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China Finance Online Co., Ltd. (JRJC) Q4 2018 Earnings Call Transcript

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China Finance Online Co., Ltd.  (NASDAQ: JRJC)
Q4 2018 Earnings Call
April 23, 2019, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to China Finance Online Reports Fourth Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today 24 of April, 2019.

I would now like to hand the conference over to your first speaker today, Mr. Dixon Chen. Thank you. Please go ahead.

Dixon Chen -- Investor Relations

Thank you operator. Welcome to China Finance Online's 2018 fourth quarter and full year 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 Q&A 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 Private Securities Litigation Reform Act of 1995. The words belief, estimates, plans, expect, anticipate, 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 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 & Exchange Commission 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. Zhao do (ph)?

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

Good morning, and good evening. Thank you for joining today's call.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language)

Dixon Chen -- Investor Relations

Our top line further improved from third quarter while our net loss was narrowed, through the effort of controlling costs and improving efficiency. For 2018, our net revenue increased year-over-year and our bottom line losses were reduced by $16.8 million. With the priority of strengthening future growth potential we will continue to improve efficiency.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language)

Dixon Chen -- Investor Relations

While the stock markets suffered major losses in China and Hong Kong during the fourth quarter, our equity brokerage related business maintained a strong growth momentum and our intelligent-finance driven fintech business continued to lock in contracts with leading brokerage firms in China. We are pleased that we have established strategic partnerships with influential financial institutions in China and are developing systems to empower their wealth management businesses.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

Entering into 2019, we recently won multiple contracts from leading brokerage firms in China. In January 2019, we announced that we have entered into a contract with Orient Securities, a Top 10 leading brokerage firm in China according to the Securities Association of China, to construct a intelligent, contextual, pragmatic online nationwide investor education center to equip Orient Securities with industry-leading comprehensive intelligent solution for investor education. In addition to Orient Securities, we have also entered into contracts with other leading brokerage firms such as BOCI which is Bank of China International and Southwest Securities to develop smart and customized solutions for investor education..

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

We also signed a Strategic Partnership Agreement with Founder, CIFCO Futures, a leading futures brokerage firm in China. Pursuit to the partnership agreement both parties will collaborate in the development of more advanced trading system, smart market news alert, cloud-based research platform and industry forums.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

The changing market environment is posing more challenges to financial advisors. In late 2018, we launched the i-TAMP platform, which stands for Turnkey Asset Management Platform to provide financial advisor consultation and advice on stocks, mutual funds, wealth management products, insurance, trusts and other financial products. Featuring best in class TAMP, this platform has already attracted hundreds of financial advisors to open their online offices to provide services to mass retail investors.

The key benefits of the i-TAMP platform are the superior user experience and robust product functionalities, which empower financial advisors to better service their clients.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language)

Dixon Chen -- Investor Relations

According to our proprietary asset allocation system, our Robo-Advisor product, Lingxi provides Chinese retail investor with a wide array of investment combinations and strategies and personalized global asset allocation through Chinese domestic mutual funds. Since its inception Lingxi significantly outperformed all Chinese market key indexes and most of the peer products in the Chinese marketplace. In 2018, the Shanghai Composite Index experienced a loss of 24.6%. However 95% of the strategies in our Robo-Advisor product, Lingxi posted positive returns, with a defensive strategy yielding an annual return of 5.28% in 2018. Since its inception in 2017 to the end of 2018, the accumulated return of our Lingxi's high risk, medium risk and low risk strategies were 16.94%, 13.91% and 19.79% respectively.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

Our other operations have also been making solid progress. Our website jrj.com.cn remains a popular destination for news and analysis on the economy and capital markets and its unique visitor all year in 2018 rose to 253 million from 236 million in 2017 and 169 million in 2016. The strong growth of traffic to our sites was attributable to the improvement of our fact based journalism, breaking news coverage and proprietary deep dive content.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

Being one of the largest online financial media, we take pride in our original content development. As the number two most popular financial news website in China by Sina, the company choose our 253 million unique visitors in 2018, along with a robust presence in large Chinese social media domain, including 2.7 million followers on Weibo, 1 million followers on WeChat and 1.8 million followers on TikTok. In recent months, we have been consistently ranked number one on Baidu's financial institutions value board for our 500,000 followers and accumulative reads of 410 million.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

In 2018, our media content department received a slew of awards and letters of appreciation from China Banking Association, China Banking Regulatory Commission, and Securities Investment Association and National Internet Finance Association of China for our outstanding media coverage on Chinese banking industry and stock markets. These accolades are government endorsement of our efforts in promoting rational and long-term investment philosophy.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

Also in December 2018, we hosted the 2018 Fintech Forum & Leading China Annual Awards, in Beijing. The key discussions were centered around artificial intelligence, data security, big data, risk management, Internet of Things and blockchain. The conference is committed to promoting the long-term health of the financial industry in China and has received high recognition from financial regulators and institutions.

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

With that I'll now turn the call to our Vice President, Lin Yang to go over the financial details for the quarter and the full year results. Thank you.

Lin Yang -- Vice President

Thank you, Mr. Zhao. Let me walk you through our major items for the fourth quarter. Please note that all financial numbers are unaudited and are presented in U.S. dollars rounded to 1 decimal point for approximation.

Net revenues were $10.7 million, compared with $13.6 million during the fourth quarter of 2017 and $8.6 million during the third quarter of 2018. During the fourth quarter of 2018, revenues from financial services, the financial information and advisory business, and advertising services contributed 53%, 19% and 28% of the net revenues, respectively, compared with 66%, 21% and 12%, respectively, for the corresponding period in 2017.

Revenues from financial services were $5.7 million, compared with $8.9 million during the fourth quarter of 2017 and $4.7 million during the third quarter of 2018. Revenues from financial services consist mainly of equity brokerage services. The year-over-year decrease of revenues from financial services was mainly due to the reduced revenue from the equity brokerage business. The quarter-over-quarter increase was mainly driven by the strengthening of Rifa's equity brokerage business.

Revenues from financial information and advisory business were $2 million, compared with $2.9 million during the fourth quarter of 2017 and $2.4 million in the third quarter of 2018. Revenues from financial information and advisory business were comprised of subscription services from individual and institutional customers and financial advisory service. During the fourth quarter, subscription revenue from individual investors decreased by 12.3% year-over-year, mainly due to the effects of streamlining sales team and upgrading business operation for long-term healthy growth during the fourth quarter.

Revenues from advertising services were $3 million, compared with $1.6 million in the fourth quarter of 2017 and $1.4 million in the third quarter of 2018. The increased traffic to our site also helped elevate our advertising revenues on both a year-over-year and quarter-over-quarter basis.

Gross profit was $6.9 million, compared with $6.8 million in the fourth quarter of 2017 and $5 million in the third quarter of 2018. Gross margin in the fourth quarter of 2018 was 65.1%, compared with 49.7% in the fourth quarter of 2017 and 58.2% in the third quarter of 2018. The year-over-year and quarter-over-quarter increases in gross margin were mainly due to increased revenue contribution from advertising, which carries a higher gross margin.

General and administrative expenses were $4.9 million, compared with $4.1 million in the fourth quarter of 2017, and $3.1 million in the third quarter of 2018. The year-over-year and quarter-over-quarter increases were mainly attributable to increased bad debt provisions.

Sales and marketing expenses were $4.4 million, compared with $6.8 million in the fourth quarter of 2017, and $4.8 million in the third quarter of 2018. The year-over-year decrease of 35.1% was mainly attributable to the reduction of consulting fees related to commodities brokerage business and sales commissions. The quarter-over-quarter decrease of 7.4% was mainly attributable to the reduction in advertising.

Research and development expenses were $2.9 million, compared with $3.8 million in the fourth quarter of 2017 and $3.5 million in the third quarter of 2018. The year-over-year and quarter-over-quarter decreases were mainly attributable to improved efficiency after the consolidation of the R&D team throughout different business units. The company continues to maintain a team of senior software engineers, data scientists and capital market professionals to support further development in its fintech capabilities.

Total operating expenses were $12.3 million, compared with $14.7 million in the fourth quarter of 2017, and $11.3 million in the third quarter of 2018. The year-over-year decrease was mainly due to improved efficiency and effective cost controls. The quarter-over-quarter increase was mainly due to bad debt provisions. Loss from operations was $5.4 million, compared with loss from operations of $8 million in the fourth quarter of 2017 and a loss from operations of $6.3 million in the third quarter of 2018.

Net loss attributable to China Finance Online was $4.4 million, compared with a net loss of $8.4 million in the fourth quarter of 2017 and a net loss of $6 million in the third quarter of 2018.

Fully diluted loss per ADS attributable to China Finance Online was $0.19 for the fourth quarter of 2018, compared with fully diluted loss per ADS of $0.37 for the fourth quarter of 2017, and fully diluted loss per ADS of $0.26 for the third quarter of 2018. Basic and diluted weighted average numbers of ADS for the fourth quarter of 2018 were 22.8 million, compared with basic and diluted weighted average number of ADS of 22.7 (ph) million for the fourth quarter of 2017. Each ADS represents five ordinary shares of the company.

Now let me walk you through the 2018 full year financial results. Net revenues for full year 2018 were $45.5 million, an increase of 6.7% compared with $42.6 million for 2017.

Net revenues from financial services for the full year 2018 were $23.1 million, a decrease of 18.3% compared with $28.2 million for 2017. Net Revenues from the financial information and advisory business for the full year 2018 were $14.9 million, an increase of 45% compared with $10.3 million for 2017.

Revenues from advertising services for the full year 2018 were $7.3 million, an increase of 103.8% compared with $3.6 million for 2017. Gross profit for the full year 2018 was $28.6 million, an increase of 38.4% compared with $20.7 million in the full year 2017. Gross margin was 63% compared with 48.5% in 2017.

Net loss attributable to China Finance Online for the full year 2018 was $20 million, compared with $36.7 million in 2017. Fully diluted loss per ADS attributable to China Finance Online was $0.88 for the full year 2018, compared with $1.62 in 2017. Basic and diluted weighted average numbers of ADS for the full year 2018 were 22.8 million.

With that this wraps up my prepared summary. And operator, we are ready for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). Your first question comes from the line of Bob Wilson. Please ask your question.

Bob Wilson -- -- Analyst

Yes, thank you and good morning. Your R&D and selling expenses continued to go down in the fourth quarter. However your G&A expenses went up significantly. Do you think the outstanding receivables may be at risk?

Dixon Chen -- Investor Relations

(Foreign Language).

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

The increase of G&A expense is mainly due to the bad debt provision for the security deposit in our former commodity trading business. This is a one-time non-recurring event. As we are not sure whether the deposit -- the security deposit will be achieved, we made such adjustment in our book. But again, it's a one-time adjustment, and so that's causing an increase on the G&A expenses for the fourth quarter.

Bob Wilson -- -- Analyst

Okay, thank you. Also your advertising business had a strong quarter. Do you think you can continue to grow them into a major revenue source like other portal companies?

Dixon Chen -- Investor Relations

(Foreign Language).

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

Reviewing Alexa's ranking of the mainstream websites, the influence (ph) of our website continued to rise. The stronger influence is now being translated into increase of advertising revenue, which is a very good encouraging sign for us. At the meantime, we are also broadening our offerings by introducing more novel models, including ThinkTac for financial information services, news dissemination and distribution and investment opportunity discovery. Our goal remains to provide mass investors and public companies with enriched -- with enriched services, better user experience and enhance the user value.

Bob Wilson -- -- Analyst

Okay, thank you.

Dixon Chen -- Investor Relations

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Pat Murphy. Please ask your question.

Pat Murphy -- -- Analyst

Hi guys. The Chinese stock market is having an amazing rebound this year. Do you expect your revenues from individual subscription and advisory services will pick up in a significant way in 2019?

Dixon Chen -- Investor Relations

(Foreign Language).

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

In order to promote long term health and development of our investment advisory business, we implemented and introduced a series of upgrades and optimizations of our customer acquisition, content development and team building in 2019. Since then we have noticed the significant improvement with the reinvigorated marketing sentiment and investor confidence, the restored investment confidence, we are upbeat that the future -- on the future of our investment advisory business.

Operator

(Operator Instructions) Your next question again from the line of Pat Murphy, please ask your question. Hello, Mr. Murphy.

Pat Murphy -- -- Analyst

Hello.

Operator

Yes, go ahead. Hello, Mr. Murphy, your line is open. Please ask your question. Hello Mr. Murphy, your line is now open. Please ask your question again.

Pat Murphy -- -- Analyst

Okay. Apparently the performance of your Robo-Advisor is outstanding. What kind of strategies do you -- does your program imply to achieve a positive return in a massive down market? How are they doing this year?

Dixon Chen -- Investor Relations

(Foreign Language).

Zhiwei Zhao -- Chief Executive Officer

(Foreign Language).

Dixon Chen -- Investor Relations

Since you talk about our Robo-Advisor, since its inception Lingxi has not only consistently outperformed the Shanghai Composite Index, but continuously beaten the majority of the peer product in the marketplace as well. In 2018 the Shanghai Index suffered massive loss of nearly 25%. But 95% of our Lingxi investment strategies produced positive returns. And one of our defensive strategies returned an annual growth of over 5%.

So from 2017 to the end of 2018 the best performing strategy of Lingxi reached a positive 17% return. So these are encouraging to see. To sum it up, the success of Lingxi is attributable to our fintech resource accumulation in the past years and also our commitment to developing best-in-class asset allocation system. Lingxi is essentially built upon these five star strategies from our proprietary asset allocation systems. So with this kind of level of success we're seeing in the last, about two years performance, we now look forward to introduce these products to our institutional clients, and further empowering their wealth management businesses with our technologies.

Operator

This will be the end of our question-and-answer. I'll hand back now to our today's presenter.

Dixon Chen -- Investor Relations

Thank you for attending China Finance Online fourth quarter and 2018 earnings conference call. We look forward to speaking with you. You have a good day.

Operator

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

Duration: 41 minutes

Call participants:

Dixon Chen -- Investor Relations

Zhiwei Zhao -- Chief Executive Officer

Lin Yang -- Vice President

Bob Wilson -- Analyst

Pat Murphy -- Analyst

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