U.S. Markets closed

Edited Transcript of JRJC earnings conference call or presentation 14-Sep-18 12:00am GMT

Q2 2018 China Finance Online Co Ltd Earnings Call

BeijingBeijing Sep 20, 2018 (Thomson StreetEvents) -- Edited Transcript of China Finance Online Co Ltd earnings conference call or presentation Friday, September 14, 2018 at 12:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dixon Chen

* Lin Yang

* Zhiwei Zhao

China Finance Online Co. Limited - Chairman & CEO

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the China Finance Online Report Second Quarter 2018 Earnings Conference Call. (Operator Instructions)

I must advise you that this call is being recorded today, Friday, 14th of September, 2018.

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

--------------------------------------------------------------------------------

Dixon Chen, [2]

--------------------------------------------------------------------------------

Thank you. Thank you, operator.

Welcome to China Finance Online's 2018 Second Quarter and First 6 Months Financial Results 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, management will hold a Q&A session. We will provide translation during the Q&A.

Before we begin, I will 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 believe, estimates, plans, expect, anticipate, projects, targets, optimistic, intent, 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 and 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 to Mr. Zhao.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [3]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [4]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [5]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [6]

--------------------------------------------------------------------------------

During the second quarter of 2018, our revenues were up year-over-year while our costs were down, and our bottom line losses continue to narrow. Under the weak market conditions, we continued to reduce cost and improve efficiency.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [7]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [8]

--------------------------------------------------------------------------------

The Chinese stock market suffered a crushing selloff during the second quarter of 2018, and the Shanghai Index plunged from around 3,200 to 2,800. However, the traffic to our flagship website, jrj.com.cn, bucked this market trend and rose to #430 in Alexa's Global Ranking and #62 in China. We remain one of the most trusted financial news hubs with our proprietary content, fact-based journalism and breaking news coverage and analysis on the market trends.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [9]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [10]

--------------------------------------------------------------------------------

We continue concentrating on expanding our fintech capabilities as we further develop and optimize our intelligent finance products, which enables investors to identify investment opportunities and discover value stocks. As the Shanghai index sank to a new 3-year low, many value-driven institutional investors began entering into the market. We believe our cloud-based investment research platform, Genius Zhisheng, is well positioned to assist portfolio managers to navigate through the massive industry data and corporate historical financial data to enable them to back test their investment strategies in a speedy fashion. We have large number of beta test programs in place with the leading brokerage firms and wealth management advisers.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [11]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [12]

--------------------------------------------------------------------------------

Based on our core intelligent asset allocation technology, we introduced Lingxi Robo-Advisor at the end of 2016. Since its inception, Lingxi has been outperforming the market for investment returns with a lower drawdown. In the second quarter of 2018, the Chinese stock market experienced one of the largest selloffs, pushing the quarterly loss of Shanghai Composite Index 10.1% and year-to-date loss to 13.9%. However, Lingxi Robo-Advisor posted an average loss of 0.5% in the second quarter of 2018 and an average return of 0.7% gain in the first 6 months of 2018, with an average drawdown rate of 2.1% in the second quarter of 2018 and 4.6% in the first 6 months of 2018, respectively. These results significantly outperform the Shanghai Composite Index for the investment return with a substantially lower drawdown. According to our internal research, Lingxi's performance in the first 6 months of 2018 also exceeded most of its peer product in the market with its better return and lower drawdown. In the second quarter of 2018, one of the best performing strategies by Lingxi produced an annualized return of 6%.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [13]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [14]

--------------------------------------------------------------------------------

Lingxi Platinum products, catering for the mass affluent investors in China, outperformed the average level of public fund -- public funnel funds for investment returns and with lower drawdown. During the second quarter, Shanghai-Shenzhen 300 Index suffered a 9.9% loss, while Lingxi Platinum product core strategy was only down 1.4%. Lingxi Platinum product alleviated the market -- the broad market selloff impact to its clients and demonstrated its resilience and efficiency of the multiple strategy global asset allocation program.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [15]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [16]

--------------------------------------------------------------------------------

As Lingxi Robo-Advisor continues to outperform the benchmark index as well as its peer product in the marketplace, our superior track records drew attention from institutions looking for solutions to enrich their services to their clients. Recently, we entered into a partnership with the world-leading enterprise service provider, YonYou Network Technology, for corporate intelligence asset allocation. On August 18, 2018, we launched the first financial product Enterprise Xianjin Bao on YonYou Financial Cloud platform, aiming to manage enterprise liquid assets to produce steady returns. On such platform, we will provide our intelligent corporate cash management solutions to over 4 million corporate customers and other organization customers of YonYou. Built upon our extensive research of comprehensive fund performances and intelligent asset allocation, this cash management product will help YonYou's customers to maximize the efficiency of their funds.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [17]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [18]

--------------------------------------------------------------------------------

The recently formed partnership of corporate intelligent asset allocation with YonYou not only demonstrated YonYou's recognition of our fintech capability but also opens the door for our cloud-based Software-as-a Service to penetrate the large corporate wealth management market in China.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [19]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [20]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Lin Yang, [21]

--------------------------------------------------------------------------------

Thank you, Mr. Zhao.

Let me walk 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 1 decimal point for approximation.

Net revenues were USD 12.9 million compared with USD 9.6 million during the second quarter of 2017 and USD 13.3 million during the first quarter of 2018.

During the second quarter of 2018, revenues from financial services, the financial information and advisory business, and advertising services contributed 46%, 44% and 9% of the net revenue, respectively, compared with 67%, 20% and 10%, respectively, for the corresponding period in 2017.

Revenues from the financial services were USD 6 million compared with USD 6.4 million during the second quarter of 2017 and USD 6.7 million during the first quarter of 2017 (sic) [2018].

Revenues from financial services represent mainly equity brokerage services. The equity brokerage business grew 21.8% year-over-year. The year-over-year decrease in 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 the precious metal exchange in China in 2017. Revenues from the commodities brokerage were USD 1.6 million or 17% of the total revenues in the second quarter of 2017.

Revenues from the financial information and the advisory business were USD 5.7 million, an increase of 187.5% from USD 2 million during the second quarter of 2017 and an increase of 15.5% from USD 4.9 million in the first quarter of 2018.

Revenues from the financial information and advisory business were mainly comprised of subscription services from individual and institutional customers. During the second quarter, subscription revenues from individual customers grew by 1,774.6% year-over-year and 62.7% quarter-over-quarter, driven by the increased subscription of the company's cloud-based analytical tools. The year-over-year and the quarter-over-quarter increases of revenues from financial information and advisory business were mainly due to an increase in subscription revenues from individual customers.

Revenues from advertising services were USD 1.2 million compared with USD 0.9 million in the second quarter of 2017 and USD 1.7 million in the first quarter of 2018. The increased traffic to our site and the readership recognition from our premium content helped to elevate our advertising revenues on a year-over-year basis.

Gross profit was USD 8.5 million compared with USD 5.1 million in the second quarter of 2017 and USD 8.2 million in the first quarter of 2018. Gross margin in the second quarter of 2018 was 65.5% compared with 52.9% in the second quarter of 2017 and 61.9% in the first quarter of 2018. The year-over-year and quarter-over-quarter increases in gross margin were mainly due to revenue mix changes associated with the growth of the financial information and advisory business, which carries a higher margin.

General and administrative expenses were USD 3 million, a decrease of 22.3% from USD 3.9 million in the second quarter of 2017 and a decrease of 7.7% from USD 3.3 million in the first quarter of 2018. The year-over-year decrease was mainly due to the suspended operations of the commodities brokerage services, and the quarter-over-quarter decrease was mainly attributable to more stringent expense control measures and streamlined operations.

Sales and marketing expenses were USD 6.6 million, a decrease of 10.2% from USD 7.3 million in the second quarter of 2017 and an increase of 5.5% from USD 6.2 million in the first quarter of 2018. The year-over-year decrease was mainly attributable to the reduction in headcount and rental expenses associated with the terminated commodity brokerage operation.

Research and development expenses were USD 3.8 million, a decrease of 11.5% from USD 4.3 million in the second quarter of 2017 and with no significant difference from USD 3.8 million in the first quarter of 2018. The year-over-year decrease was mainly attributable to improved efficiency after the consolidation of the R&D team. 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 USD 13.4 million, a decrease of 15.2% from USD 15.7 million in the second quarter of 2017, and no significant difference from USD 13.3 million in the first quarter of 2018. The year-over-year decrease was mainly due to improved operational efficiency and the effective cost controls.

Loss from operations was USD 4.9 million compared with a loss from operations of USD 10.7 million in the second quarter of 2017 and a loss from operations of USD 5 million in the first quarter of 2018.

Net loss attributable to China Finance Online was USD 4.3 million compared with a net loss of USD 8.3 million in the second quarter of 2017 and a net loss of USD 5.2 million in the first quarter of 2018.

Fully diluted loss per American Depository Shares attributable to China Finance Online was USD 0.19 for the second quarter of 2018 compared with fully diluted loss per ADS of USD 0.37 for the second quarter of 2017 and fully diluted loss per ADS of USD 0.23 for the first quarter of 2018.

Basic and diluted weighted average number of ADSs for the second quarter of 2018 were 22.8 million compared with basic and diluted weighted average number of ADSs of 22.7 million for the second quarter of 2017. Each ADS represents 5 ordinary shares of the company.

Now let me walk you through the first 6 months of 2018 financial results. Net revenue for the first 6 months of 2018 were USD 26.2 million, an increase of 43.3% compared with USD 18.3 million in the first 6 months of 2017.

Gross profit for the first 6 months of 2018 was USD 16.7 million, an increase of 83.2% compared with USD 9.1 million in the first 6 months of 2017.

Net loss attributable to China Finance Online for the first 6 months of 2018 was USD 9.5 million compared with a net loss of USD 19.9 million in the first 6 months of 2017.

Fully diluted loss per ADS attributable to China Finance Online was USD 0.42 for the first 6 months of 2018 compared with fully diluted loss of USD 0.88 for the first 6 months of 2017.

As of June 30, 2018, total cash and cash equivalents, restricted cash and short-term investments were USD 17 million.

Total shareholders' equity of China Finance Online was USD 45.4 million as of June 30, 2018.

With that, this is our prepared summary. And operator, we are ready for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from the line of [Bob Wilson].

--------------------------------------------------------------------------------

Unidentified Analyst, [2]

--------------------------------------------------------------------------------

It's encouraging to see this description for retail investors is growing. Can you elaborate a bit more why it's growing so fast, and whether this type of growth is sustainable for the coming quarters?

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [3]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [4]

--------------------------------------------------------------------------------

Based on our fintech capability, we developed smart stock-picking tools and cloud-trading strategies to enable our user to better identify trading opportunities on individual stocks. Also, we provide a highly personalized algorithm based upon their risk tolerance and investment styles. As you know, as the market becomes more volatile, retail investors are seeking for assistance in their decision-making. We believe this trend will continue. Although the Chinese Stock Market Index has not been performing very well recently, China is still a major market, with over 140 million retail individual investors and over 3,500 public listed companies, many of which are still producing solid growth. We believe that our services are well positioned for value creation.

--------------------------------------------------------------------------------

Unidentified Analyst, [5]

--------------------------------------------------------------------------------

On the institutional subscription business, I know you're doing a bunch of testing with broker-dealers and financial advisers. What is holding them up from signing? What kind of competing products are you seeing in the marketplace right now?

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [6]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [7]

--------------------------------------------------------------------------------

You're correct that many broker-dealers or brokerage firms and advisers are running tests of our products. From their initial feedback, we have received very favorable recognition for our innovation to leverage fintech to improve their service quality and efficiency. However, their decision process of these -- these are large institutions, their decision process is very long, but we believe we're getting close.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [8]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [9]

--------------------------------------------------------------------------------

In terms of competition, there are always competition in China for any industry. However, our competitors do not provide a complete platform like ours. One is our robust computing power. Our investment research platform significantly raises efficiency for analysts and portfolio managers. To give you an example, as we are cloud-based, it only takes seconds on our platform to back-test a very complex investment strategy on past 10 years historical record in comparison of -- in comparison with ours -- other competitors' systems.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions)

The next question is from [Pat Murphy].

--------------------------------------------------------------------------------

Unidentified Analyst, [11]

--------------------------------------------------------------------------------

With the tanking stock market over there, do you see Chinese investors to cut the losses or adding positions? Do you see investors rotating out of equity market to move their money to fixed income products?

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [12]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [13]

--------------------------------------------------------------------------------

In China, the stock market is still the most prevailing destination for investments, and there are over 140 million retail individual investors in the market. 2018 is a transition year for Chinese stock market towards value investing. With the Chinese economy moving towards consumption-oriented economy, the earning power of many corporations, of many companies, is going to be more resilient. Considering the current low valuation of the stock market, in the long run, equity investment will produce good performance. Therefore, combining future earning power and current valuation, the Chinese stock market at this point is a good place for asset allocation. We see more value-driven investors are building -- value investors are long-term oriented, they tend to study more on the fundamentals. This presents an opportunity for us to sell our subscription services for them to come out to our platform, which is a comprehensive platform, enable them to do all kinds of research, all levels of research and improve their efficiency.

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [14]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [15]

--------------------------------------------------------------------------------

In addition, in today's market condition, on one hand, investors are working on capturing long-term investment opportunities or are identifying long-term investment opportunities. And on the other hand, they're also looking for better diversification for their asset allocation. So our Lingxi Robo-Advisor is here to provide retail individual investors with a more personalized global asset allocation through mutual fund offers. For example, in the first half of the year, Shanghai Composite Index fell by 13.9%, while our Lingxi achieved 0.7% positive return. Also during the second quarter, Lingxi's best strategy produced an annualized return of 6%. So all these are pretty positive.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) We have a follow-up question from [Pat Murphy].

--------------------------------------------------------------------------------

Unidentified Analyst, [17]

--------------------------------------------------------------------------------

This partnership with Chinese corporate software companies is interesting. In the United States, we have ADP for large corporations and Quicken for SMEs. They're building some interesting new financial services. Can you tell us more about your partnership and what your partnership entails, especially on how you plan to monetize it?

--------------------------------------------------------------------------------

Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [18]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Dixon Chen, [19]

--------------------------------------------------------------------------------

Thank you. It's a good question. It's certainly an important breakthrough for us, this partnership with YonYou we just announced. As you all know, corporates are a vital part of the economy. Many of them are under-serviced. YonYou is the largest corporate software provider in China with over 4 million corporations and small and medium enterprises clients. Initially, we will collaborate in the area of corporate cash management solution by providing superior algorithm and research platform to enable YonYou's customers to construct portfolios of high-quality money market funds to meet their cash management needs. Later on, we can explore areas of -- such as pension investment or others. Corporate financial services are very large and unmet -- has a very large unmet demand in China. There are many ways to monetize it. So we'll recommend you to stay tuned as we will make announcement in the future.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

(Operator Instructions) Now we reached the end of the Q&A session. I would now like to hand the conference back to today's presenters. Please continue.

--------------------------------------------------------------------------------

Dixon Chen, [21]

--------------------------------------------------------------------------------

Thank you, everyone, for attending China Finance Online 2018 Second Quarter Earnings Conference Call. We look forward to speaking with you.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

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