China Finance Online Co. Limited
Q3 2014 Earnings Call Transcript

Published: 23 Dec 2014

[Operator:]

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

[Julie Zhu:]

Thank you, operator. Welcome to China Finance Online's third quarter 2014 earnings conference call. With us today are Mr. Zhiwei Zhao, Chairman and CEO; Mr. Jeff Wang, Board Member 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.

[Zhiwei Zhao:]

[Foreign language] Thank you good morning and good evening everyone. Welcome to China Finance Online's third quarter 2014 earnings call. We’re pleased to announce that we have made a significant step towards the full integrated securities trading and well stop wealth management service platform. One week ago, we launched the basic test for Investment Advisory Service Platform or Investment Masters in Chinese iTouGu, allowing a vast number of Chinese individual investors to obtain previously private advice from thousands of investment advisors. In addition, the investment masters platform provides these highly demanded features including text and audio interactive messaging system allowing real-time testing and P&L between advisors and followers. Daily market and analytics research reports and investment strategies to investment advisors. Such risk order placements roughly connecting to the company's Securities Master platform and finance management system for every investment advisor to review and manage client profiles, historic data and activities. Unlike our U.S securities market Chinese securities market is mainly composed of individual investors. According to China securities industry and or CITIC there are about 91 million securities investors in china as of December 19, 2014. According to our knowledge about 80% out of these are individual investors who have a lack of capital market know how and investment methodology. Without including investing advisors on the platform, Investment Masters provides the much needed and real time advice on investments. We just announced earlier during the third quarter of 2014 we launched Zhengquantong Securities Master. Together with our investment advisory service platform iTouGu that could activate and expand Chinese securities market. After the announcement of our later financial service platform we have entered into strategic partnership agreement with nine securities companies and gone live with CITIC Securities, Zhongshan Securities, Great Wall Securities and will continue to enter into strategic partnerships in many areas. Turning forward our team work is seriously fully committed to build the comprehensive financial ecosystem, including online securities trading, wealth management and investment advisory, and to make investment easier for Chinese retail investors. Recent release of regulatory changes in China's securities industry and our dedication in internet-driven service innovation will enable us to be an important participant in this new area of large-scale financial reform. Now I will turn the call over to our CFO, Mr. Jeff Wang for our detailed financial results. Thank you.

[Jeff Wang:]

Thank you Johnson. First of all let me review our third quarter 2014 financial results. Please note that all financial numbers are presented in U.S. dollars and rounded to one decimal point for approximation. Net revenues for the third quarter of 2014 was US$21.1 million, an increase of 61% from US$13.2 million for the corresponding period in 2013, an increase of 3% from US$20.6 million in the second quarter of 2014. The company’s net revenues are categorized under; A, revenues from financial services, which include growth-related and precious metals treatment services; and B, revenues from financial information business, which include subscription services from individual and institutional customers; and C, revenues from advertising services. During the third quarter of 2014, revenues from financial services, financial information business and advertising services contributed 81%, 11% and 8% of our net revenues, respectively, compared with 68%, 21%, and 9%, respectively, for the corresponding period in 2013. Revenues from financial services were US$17.1 million, an increase of 92% from US$8.9 million in third quarter of 2013, and an increase of 4% from US$16.4 million in the second quarter of 2014, mainly driven by the continuous growth of the financial service business. Revenues from financial information business were US$2.3 million, a decrease from 19% from $2.8 million in the third quarter of 2013, and a decrease of 8% from US$2.5 million in the second quarter of 2014, mainly due to the company's previously disclosed strategic business transition. Revenues from advertising were US$1.8 million, an increase of 47% from US$1.2 million in the third quarter of 2013, an increase of 5% from US$1.7 million in the second quarter of 2014. Gross profit was US$16 million, an increase of 41% from US$11.4 million in third quarter of 2013, an increase of 6% from US$13.1 million in the second quarter of 2014. Gross margin in the third quarter of 2014 was 76% compared with 86% in the third quarter of 2013 and 74% in the second quarter of 2014. The year-over-year decrease in gross margin was mainly due to increased commission cost related to the continuous growth of financial services. General and administrative expenses was US$6.4 million or 30% of net revenues representing an increase of 63% from US$3.9 million in the third quarter of 2013 an increase of 56% from US$3.8 million in the second quarter of 2014 mainly due to an increase of share-based compensation expenses. Sales and marketing expenses were US$9.1 million or 43% of net revenues representing an increase of 23% from US$7.4 million in the third quarter of 2013 and a decrease of 29% from US$12.9 million in the second quarter of 2014. Research and development expenses were US$2.6 million or 12% of net revenues representing an increase of 10% from US$2.4 million in the third quarter of 2013 and an increase of 2% from US$2.6 million in the second quarter of 2014. The year-over-year increase was mainly driven by the increase in headcount expenses by the development of Zhengquantong or the Securities Master. Net loss attributable to China Finance Online was US$2.4 million compared with a net loss of US$1.6 million in the third quarter of 2013 and loss of US$6.4 million in the second quarter of 2014. Non-GAAP net income attributable to China Finance Online was excluded from non-cash share-based compensation expenses was US$1.1 million compared with a non-GAAP net loss of US$1 million in the third quarter of 2013 and a non-GAAP net income of US$2.3 million in the second quarter of 2014. Basic and diluted weighted average number of ordinary shares for the third quarter of 2014 was 109.3 million each ADS represents 5 ordinary shares of company. For the shareholders equity of China Finance Online was US$60.6 million as of September 30th, 2014. Now the first nine months of 2014 financial results. Net revenues for the first nine months of 2014 was US$64.9 million, an increase of 147% from US$26.3 million in the first nine months of 2013. Revenues from financial services increased by 290% year-over-year to US$51.4 million compared with US$13.2 million in the first nine months of 2013. Gross profit for first nine months of 2014 was US$49 million, an increase of 143% from US$20.2 million in the first nine months of 2013. Net loss attributable to China Finance Online for the first nine months of 2014 was US$10.8 million compared to US$10.4 million in the first nine months of 2013. Now let me walk you through our financial condition. Total shareholders' equity of China Finance Online was US$50.6 million as of September 30th, 2014. As of September 30th, 2014 total cash and cash equivalents was US$25.3 million an increase from US$20.4 million as of June 30th, 2014 and decrease from US$36.4 million as of December 31st, 2013. With that Operator, we’re ready to begin the Q&A session.

[Operator:]

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of [Alex Hiving] [ph] [indiscernible] from DN Capital. Please ask your question.

[Unidentified Analyst:]

I had a few questions, one, I am just wondering if you could give a little bit more color and detail on the beta test and launch for iTouGu, what kind of your outlook for the next year on that is and how the rollout, when you would be launching it in a non-beta from? The second relates to the impact of the recent [A shares rally] [ph], obviously that’s causing a lot of interest all around the world and how that has been affecting your new account openings since the beginning of the quarter? And then lastly the third question since you guys have started cooperating with large brokerage chains like CITIC Securities and others, are you guys looking to do any type of financing placement with them or get them as strategic investors in China Finance Online?

[Unidentified Company Representative:]

[Indiscernible] data from the Company. [Indiscernible]. First, the question about I don't which is the Investment Masters platform. The Investment Masters platform is primarily for two platforms, we needed a [place to wrap] [ph] an equity package that meet the Chinese Securities manage. Right now it is being impacted by our partners and now internally we have the highest expectations of this act. Let me start to give you some example, there are a few branch equity offices in China for the investment advisors. Because of their service, advisor service, each of them targets. Early Investment Masters [indiscernible] many customers also greatly increase their knowledge and improved their performance and this one allowing investment advisors to possibly recommend the wealth management products for the clients. This participation each are having as for us to manage for the market. Regarding the outlook, well, with our last [indiscernible] and our alliance with many securities firms as we know, we would express the content that we can obtain in each one day or next year. We are talking about active trading units here that's on an account. So we are not able to provide exact target at this moment. About the data techniques, well, we would officially launch this; however, we cannot give you the exact projection but I would say in January or before that. You have several questions the [A share rally] [ph] well I think this is a good sign that the market is welcoming other new parties, economic parties, as well as the parties for the financial inventory. So as you know this time there are many new regulatory changes in the Chinese securities markets as well as in the financial markets, so we will say that its very positive for us as well because we are not just a participant, we aim to be a very innovative participant in this market to take advantage of the new policies, new regulatory. And then can you repeat the third question please?

[Operator:]

Your next question comes from the line of [Kevin Vincent] [ph] and he is a private investor. Please ask your question.

[Unidentified Analyst:]

As the Securities Master website [indiscernible] are now up and running how many members do you think you are going to sign up in 2015?

[Unidentified Company Representative:]

2015?

[Unidentified Analyst:]

Yes in 2015.

[Unidentified Company Representative:]

How many numbers of users? Are you asking users?

[Unidentified Analyst:]

Yes, how many users do you think you will get in 2015 for the Securities Masters website?

[Unidentified Company Representative:]

Yes, sure. It’s a little early for us to project those numbers because we’re still in the transition period. But with our already large current user for our part of and also our partnership with securities firms that owns millions of millions of users, we would be very confident to say we could gain 1 million users next year. However just letting it for now.

[Unidentified Analyst:]

What is the outlook for the revenue in 2016?

[Unidentified Company Representative:]

Well both of our two products, Securities Master and the Investment Master [indiscernible] have the huge needs of markets. But integrating into that, we will not only increase the users but also have the user base [indiscernible]. But right now it is very difficult for us to predict the financials for next year. So we just believe we are entering accelerated growth, our ability to join the top half of Chinese securities firms and online securities trading of wealth management companies. If you have a chance, you can take a look of these securities firm revenues and the market cap to better understand our potential future revenue structure.

[Unidentified Analyst:]

And there's been financial reforms in China and the Shanghai index has been very strong. Are you seeing benefits from these developments?

[Unidentified Company Representative:]

Yes definitely. There are many new regulatory changes in the Chinese securities market. For example, let me give you some examples, the first is the market for account system also called e-market in China, allows existing investors to open market account, a host of accounts with us. The other one is Shanghai and Hong Kong stock connect allows our investors to trade Hong Kong listed stocks; they've also been [indiscernible]. The third one is managed trading based [indiscernible] systems to be launched next year. That is a huge move towards markets of those being of securities. There also is [indiscernible] confirm that is going to grant new securities firm licenses. These are very important signs of Chinese regulated to wide open the capital market and we are the pioneer in securities market innovation by employing internet especially mobile technology to certain measures, these are very cost effective and favorable to us.

[Operator:]

Thank you. Your next question comes from the line of [Alex Hiving] [ph] from DM Capital. Please ask your question.

[Unidentified Analyst:]

Like to kind of ask for a little bit more color on the second question, and the question that the last gentleman just asked. Can you give maybe a little bit of detail have you noticed a pick-up in subscriber rates or really a sequential trend or anything so far in 2014 in the fourth quarter based on the excitement in the China A shares market. And then the third question that I had asked before which you asked me to repeat was regarding the co-operation that you have now with the number of very large and strategic Chinese brokerages. I am wondering if you guys have anything in the works or would be looking to add these people as strategic investors in shares in the equity of China Finance Online either through replacement or share trends anything like that?

[Unidentified Company Representative:]

Well, let me answer the second part first. Yes, we are cooperating with many brokerage firms [indiscernible] and definitely we are having some competitive advantage professionally in the internet area. About the strategic investment, well because we are building a platform right now, although we will consider other strategic partnerships, but for investment we are definitely going to take a few consideration of if we can build a platform that can connect to many important security firms and other financial institutions. So right now we educate wanting to connect to many security firms, not just to getting through exclusive partnerships with one firm for this moment, but of course there are a lot of changes in the market. We are very open to different new ideas that can definitely help us to further advance to take a leadership in these markets, so back to the user numbers. Yes we are still connecting to many equity firms and we are also building as you know the Investment Masters platform for now, so at this stage we are still focusing first on the technology development and application development. So far we would say we lost much promotion, our numbers are very promising, but because of a [indiscernible] we have a combination agreement with our partners. We are not ready to provide these numbers, but in the future I would say we are going to provide more performance related metrics to our investors.

[Operator:]

Thank you. We have now reached the end of our Q&A session. And I will turn the call back to over to our speaker at China Finance Online. Thank you.

[Julie Zhu:]

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

[Operator:]

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