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China Finance Online Co. (JRJC)

Q1 2006 Earnings Conference Call

May 22 2006, 9:00 pm EST

Executives

Jing Wu, Investor Relations Manager

Zhao Zhiwei, Chief Executive Officer

Sam Qian, President, Chief Financial Officer

Analysts

Navar Khan for Youssef Squali - Jefferies & Co.

Joe Apamueller -

Andrew Gaudy –DAM

Dick Wei – JP Morgan

Presentation

Operator

Thank you for holding and welcome to the 1Q 2006 financial results. (Operator Instructions) I would now like to turn the conference over to your host, Ms. Jing Wu of China Finance Online. Thank you, Ms. Wu and please go ahead.

Jing Wu

Thank you, operator. Welcome everyone to China Finance Online first quarter 2006 financial results. Today with me in the conference are Mr. Zhao Zhiwei, our Chief Executive Officer; and Mr. Sam Qian, our President and Chief Financial Officer.

After the market closed today, the Company issued a press release containing the financial results for the first quarter 2006. The purpose of this conference is to provide the investors with further detailed information regarding these financial results. Following our formal remarks, we’ll be happy to take any questions you might have.

Before we begin, it is my duty to remind you that during today’s conference call, we might make forward-looking statements. This announcement contains forward-looking statements. These statements are made under the Safe Harbor provision of the U.S. Private Securities and Litigation Reform Act of 1995. Statements that are not historical facts, including statements about our beliefs and expectations are forward-looking statements. These statements are based on current plans, estimates and projections; and therefore, you should not place undue reliance on them.

Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

Potential risks and uncertainties include, but are not limited to: China Finance Online’s historical and possible future losses; limited operating history; uncertain regulatory landscape in the People’s Republic of China; fluctuations in corporate operating results; failing to successfully compete against the new and existing competitors; and the Company’s reliance on China Finance Online’s relationship with Chinese Stock Exchanges and raw data providers.

Further information regarding these and other risks is included in China Finance Online’s annual report on form 20-F for the year ended December 31, 2004 and other filings with the Securities and Exchange Commission. China Finance Online does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

Now, I’m going to pass this call to Mr. Zhao Zhiwei, our Chief Executive Officer.

Zhao Zhiwei

Translation

Good morning and good evening. Thank you for joining us today for China Finance first quarter 2006 conference call. For this first quarter, the Company reports net revenues of $1.41 million a decrease of 27% from $1.93 million year-over-year, and differed 26% from $1.90 million quarter-over-quarter. Revenues from advertising-related business for Q1 contributed $538,000 about 38% of the net revenues.

Since the beginning of this year, we finally [saw the recovery] of the Chinese stock market. Shanghei stock index moved up from the lowest point of 1,161.91 to the highest point of 1,313.13 in the first three months of 2006.

We believe that the decrease in the number of our new and repeating subscribers numbers and ASF, we believe that for the Chinese individual investors investing in the stock markets and the demand for stock market intelligence services, including our service offerings, have been dampened by the volatility and the decline in value experienced by the Chinese stock market in the past several years.

Meanwhile, we did notice that following the recent warming up of the market, that individual investor confidence and interest may be improving, which may have led to increased user demand for stock market intelligence services such as ours. Surrounded by this environment, I am confident that China Finance Online is picking up very good points at the beginning of this year, 2006.

Being prepared to capitalize on the recent market recovery, our staff in the R&D department are working hard on the development of the new products and the upgrade of our current offerings. Meanwhile, we enhanced our marketing efforts by putting more advertisements on our home page and important channels, and also by offering some of our service packages at discounted prices for both new and active customers for promotional purposes.

Before I pass the call to Sam, I am very glad to tell you that Mr. Jun (Jeff) Wang will be joining us as the Vice President of Finance on May 24th Beijing Time, which is going to be tomorrow. Mr. Wang, before he joined us he worked as a Senior Manager in Tax and Business Advisory Services at Deloitte. I believe that his rich experiences and professional skills in the finance, accounting and business management will be a great help to this Company.

Now, our President and Chief Financial Officer Sam Qian will give details on the financial part.

Sam Qian

Thank you, Zhiwei and good morning for those in Asia and good evening for those in North America. In addition to the highlights of our financial and operational results in today’s earnings release, I would like to discuss several points in detail.

This quarter, our Company reported net revenue of $1.41 million, down compared to the same period a year ago and the previous quarter. The decrease in the revenue is mostly from the subscription services. As Zhiwei pointed out earlier, the Chinese stock market has improved this quarter compared to the last quarter. We believe the reason our net revenue in the first quarter did not reflect the stock market improvement is related to our way of sales recognition.

For advertising-related revenue in this quarter, it contributed $538,000 which is 38% of the net revenue. Compared to the same period of 2005, our Q1 advertising revenue increased about 200% but decreased about 32% compared to the last quarter.

Our gross margin for Q1 was 85% compared to 92% of the fourth quarter of 2005. We believe the decrease of the gross profit margin is because our cost of revenue is relatively fixed while our revenue has decreased.

Our total operating expenses for this quarter is $1.44 million, an increase of 100% from $0.72 million year-over-year and an increase of 40% from $1.03 million quarter-over-quarter. The increase is mainly attributable to the stock-based compensation. Excluding the incremental increases of $353,000 in stock-based compensation, or SBC, as a result of adopting FAS 123-R, our Q1 operating expenses would have been $1.13 million, which would be up around 10% compared with last quarter.

In this quarter, the Company reported loss from operations of $249,000 compared to the $1.1 million in profit for the same period in 2005, and $722,000 for the fourth quarter of 2005. Our net income was $97,000 a decrease of 92% from $1.28 million year-over-year and a decrease of 91% from $1.06 million quarter-over-quarter.

This decrease was primarily due to the decrease in our net revenue and the incremental increase of SBC expenses of $353,000 due to the adoption of FAS 123-R. Excluding the incremental SBC expenses, our net income for this quarter would have been $450,000 in profit, a decrease of about 85% from $1.06 million of the fourth quarter of 2005.

The number of our new subscribers for the first quarter of 2006 was 1,514 down year-over-year, but an increase of 18% from 1,286 for the fourth quarter of 2005. Our repeat subscribers for the first quarter of 2006 totaled 3,283 down year-over-year, but also an increase of 23% from the previous quarter. This is the first time that both our new and repeat subscribers have quarter-over-quarter sequential growth since the first quarter of 2004.

Our average subscription fee per subscriber, or ASF, for new subscribers decreased by 11% to $185 for the first quarter of 2006 from $208 for the same period in 2005; but increased by 12% from the previous quarter. The ASF for repeat subscribers decreased by 22% compared to the first quarter of 2005, and also decreased by 5% from the previous quarter.

We believe that the increase in the number of new and repeat subscribers and in ASF for the new subscribers quarter-on-quarter shows that Chinese individual investors investing interest is improving following the recovery of the stock market, leading to the increasing user demand for the market intelligence services.

To capitalize on the market recovery, we offered some of our service packages at discounted prices in this quarter, which caused a decrease in the ASF for the repeat subscribers quarter-on-quarter. We also believe that the decrease in the number of ASF for the new and repeat subscribers year-over-year were primarily because of the significant volatility and the decline in the value experienced by the Chinese stock market in the past several years; this had dampened the individual investors interest in the investments, thereby reducing the user demand for the market intelligence services.

Now, let’s move to our balance sheet. Our cash and cash equivalents was $46.39 million by the end of March 31, 2006. It was slightly up compared to the $46.17 million at the end of 2005.

Now, let’s move to the Q&A section.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Youssef Squali - Jefferies & Co.

[Navar Khan] for Youssef Squali - Jefferies & Co.

How are you?

Sam Qian

Good, how are you?

[Navar Khan] for Youssef Squali - Jefferies & Co.

Very well, thanks. I just had a couple of questions. My first question was about the ASF. As you see a pick-up in subscribers, do you see less discounting going forward? What are the expectations for the remainder of the year?

Sam Qian

As our CEO pointed out, the Chinese market has been improving over the past quarter, so we tried to grab this opportunity and launch more services and promote more products. So we probably are going to be more opportunistic in this manner. For example, if we see more demand, we might try to increase the subscription service fee. But if we see the demand slow down, we might promote some incentives, such as discounts.

Overall I think the ASF would be stable starting from here. We don’t see a significant increase, but I don’t see weakening of ASF in the future.

[Navar Khan] for Youssef Squali - Jefferies & Co.

Got it. And then moving down to the sales and marketing expense, what kind of levels should we be expecting for the remainder of the year? Because it was pretty high in the first quarter? Is this what we should be expecting going forward or should it decrease?

Sam Qian

I would say it should be very stable compared to the previous quarter, because going forward we were all using this FAS 123 R which will have no more incremental impact because the impact was already felt in the first quarter. I would say it should be very stable from here.

[Navar Khan] for Youssef Squali - Jefferies & Co.

And then on the advertising side, what kind of stable growth rate do you see for advertising revenues? What kind of seasonality should we expect here?

Sam Qian

I would like to pass that to our CEO.

Zhao Zhiwei

Translation

In the past three months, in the first quarter, some of our advertisements [inaudible] of our own product for promotional purposes and to capitalize on the recent recovery of the Chinese stock market.

Following the recovery of the Chinese markets, we work to achieve a balance between the promotions of our own product and the advertisements.

[Navar Khan] for Youssef Squali - Jefferies & Co.

Thanks. And then if I may, can I ask one last question? I wanted to ask if you could add a little bit of color on any of the [inaudible] and what kind of contributions are they having so far? In particular the distribution relationship you mentioned last quarter with the Bank of China and then [Malone International]?

Zhao Zhiwei

Translation

The seasonality has some relationship with the revenues from our advertising business, but we don’t think the seasonality is going to be the main reason for the advertising revenue. Does that answer your question?

[Navar Khan] for Youssef Squali - Jefferies & Co.

It does. Thank you.

Operator

Our next question comes from Joe [Apamueller].

Joe [Apamueller]

How are you? We have about $2.47 cash per share, right? We have no long-term debt. Is that correct?

Sam Qian

Yes, that is pretty much right.

Joe [Apamueller]

So we’ve made some buybacks in the last quarter, I believe the Company bought 3.1 million at $6.60 per share. Do we intend to buy any more stock, since the stock is in the $4 range because it got hit after the U.S. close today? Do we intend to buy more shares here?

Sam Qian

The Company believes the stock price does not reflect the Company value. But as to whether we are going to buy back further really depends on the Board. The Company thinks the market over-reacted after market. Whether there will be another buyback depends on the Board.

Joe [Apamueller]

Right, because I think the valuation is very cheap. Who are the main competitors? Who would you compare yourself competition-wise? You obviously want to be the next Bloomberg, potentially, of China. That is how I relate you in the U.S., which I have been telling my investors. Who are the competitors in China? Do you have a similar model that you would like to be potentially the next Bloomberg of China?

Sam Qian

There is no identical competitor in the arena, so we are actually competing with several competitors in different areas. For example, in terms of a financial information portal, we are competing with, say, Hexun.com, and stockstar.com, stockstar.cn. But those two companies are really deviating away from their original business model.

For example, Hexun is starting to launch services in blogs, so they are de-emphasizing the financial services. Stockstar is also changing their business model, shifting away to the wireless financial services. So on this front, we have no strong competitors.

But we are also competing with several other competitors in other areas for example, for the software services, we are competing with several individual vendors, but they do not have a strong customer flow like we have from our website. But the do provide some similar software services. So we are competing with them in this.

Also, some people might argue by saying that Sohu.com’s finance channel and Sina’s finance channel are also competing with us; but again, they are not competing with us 100% because they only provide free quotes and financial content. They do not provide value-added subscription services like we have. So their business model is mainly from the advertising.

Just to conclude, there is no 100% similar competitor against us, but we have several ones from different angles.

Joe [Apamueller]

Right. I use Thomson ONE, as you know, in the U.S. They are much cheaper than Bloomberg, but the software is terrific. Are they aware of what you are doing? Are you aware of what Thomson is doing? Can you give a similar type of product? Are you familiar with Thomson ONE?

Sam Qian

A lot of foreign financial service vendors have approached us, and we have been talking to some of them, but the Chinese market is slightly different from the U.S., so we are seriously evaluating several opportunities. It is not going to be a 100% perfect match for any of those service vendors. It has to be localized first.

Joe [Apamueller]

Now, what makes a product in that area unique? What is the main uniqueness about our product? What gives it the advantage that you feel going forward? What is going to really grow China Finance to the next level?

Sam Qian

Well, I think one of the unique things about our product is that because we have one of the largest financial websites in China, and millions of people come to our website every day, so we know the customer needs first. We can monitor the customer behavior through various channels, so we can update and modify our product to their needs. So in that sense, we are one of the first service providers that can capture the new trends and the new habits of the customer behavior. So in that sense, we have a first mover advantage.

Also, we have a state-of-the-art services that captures the new technologies. For example, right now we are testing and developing new services that can utilize more real-time data information that we got from the exchanges, so there are a lot of advantages compared to our competitors.

Joe [Apamueller]

Do you see the revenues growing next quarter, second, third, and fourth from here on in, due to your increase in sales and marketing? It seems like you are putting a lot of money into sales and marketing for a reason, right?

Sam Qian

Yes, that is right. First of all, you can see from our report, both our new and repeating subscribers has been growing quarter over quarter, as I pointed out earlier. This is the first growth in both new and repeat subscribers over the past two years.

Also, our enterprising online and offline has paid off, which was reflected in our traffic flow. We have experienced new high traffic flows days after days in the past, which we think should pay out dividends in the near future.

Joe [Apamueller]

How much stock is held by insiders out of the 18.7 million in ADR’s? What percentage is held by insiders, approximately?

Sam Qian

Actually, you are going to see our 20-F soon. I hope you can go there and see the detailed information.

Joe [Apamueller]

Where? I’m sorry.

Sam Qian

In the 20-F. We are going to publish the 20-F tonight, so you should be able to see that tomorrow morning.

Joe [Apamueller]

That will be on the news?

Sam Qian

In the Nasdaq filings, so you should see that at the SEC’s --

Joe [Apamueller]

Well, you can’t tell me now? I am not online now.

Sam Qian

Okay. It should be roughly over 50%.

Joe [Apamueller]

Over 50%?

Sam Qian

Yes, by the related parties.

Joe [Apamueller]

Is that insiders?

Sam Qian

Yes, you call it -- in the SEC, it is called affiliate.

Joe [Apamueller]

So 50% of the 18.7 million shares are held by…

Sam Qian

No, no, no -- it is 50% of the overall outstanding shares.

Joe [Apamueller]

On U.S., on ADR’s, of 18.7 million shares? I am going by U.S.

Sam Qian

That I do not know, because we do not have that information. I am talking about the total outstanding shares, i.e. 20 million ADR’s. 50% of the total ADR’s are held by affiliates.

Joe [Apamueller]

Right. Where do you normally buy those shares, if the Company has a buyback? In China or could they do it through the U.S.?

Sam Qian

We rigorously follow the SEC rules, so in order to fulfill the buyback, we have to apply a brokerage firm and then they will buy back on behalf of us, so we have no say with the results, like how to execute it. They have to follow certain rules.

Joe [Apamueller]

No, I know, but if you want to, I can execute -- Great Eastern. We have a website, if you want to call me at my office, Jing has my number there, and I can execute at the better price than any competitor out there. If you want to call me at 646-…

Sam Qian

Okay, our secretary is writing down your number, but next time, if the board is considering buybacks, yes, we will give you a call.

Joe [Apamueller]

When is the management going to be in New York?

Sam Qian

It is not on the radar yet.

Joe [Apamueller]

Because I really think you have something very special here; you are undiscovered, and it’s an undiscovered gem, and I think a trip to New York might be able to help and I really believe this company, if I am looking at it right, could be a $1 billion plus company. Because the subscriber base is there, if you have earnings growing, hopefully going forward, and there is really not too much competition in the local markets, correct?

Sam Qian

Yes. I think we have a good advantage, because as a matter of fact, we are the only NASDAQ company in China that is providing financial information services. We also have the highest brand-name awareness in China.

Joe [Apamueller]

Could we have a poison pill in place?

Sam Qian

That is a good question. Actually, we are a [Hong Kong] company, so we do not have a poison pill.

Joe [Apamueller]

You should think about that; because at these lower levels, you are going to get some people looking at you.

Sam Qian

We have other entire hostile-beating mechanisms.

Joe [Apamueller]

Why do you think the stock is so low? Do you think it is just no one knows the story, it’s off the radar screen? How are we going to get the word out there?

Sam Qian

My observation, and here is my personal view: the financial market always overreacts. Also as you say, a lot of people do not fully understand this Company, so they think they will just follow the map. The smart investor always thinks independently, and sometimes has to be a little bit conservative.

Joe [Apamueller]

Right, but do we have any research coverage that you would tend to look at in the U.S.? Any companies here? Maybe a research analyst here that might cover the space? Anyone that maybe covers Kong, maybe covers Baidu, maybe covers Linktone? You know, some analysts here that may be able to write you up? Have you thought about that?

Sam Qian

Yes, I think that we have a couple with coverage, yes. I think in the future we will look for more analysts to cover.

Joe [Apamueller]

What do you intend to do with your cash? You have a good cash position. Are you going to increase just with advertising and marketing? What else do you intend to do with the cash?

Sam Qian

Well, this is more like a specific issue. Let me pass that to our CEO. Maybe he can answer you better.

Joe [Apamueller]

Thank you.

Zhiwei Zhao

Translation

[inaudible] IPO company and it is looking for different potential [companies] including good targets for acquisition and merger. Personally, I do not think that we have specific items or projects that we are ready to release.

Joe [Apamueller]

Okay, I understand. Going back before, I am sorry, we’re the only NASDAQ company that provides financial data in China? Is that correct?

Sam Qian

Yes, that is a fair statement.

Joe [Apamueller]

Yes, so that is an edge. I would definitely love to meet you. Jing, if you could set that up. If you can call me tomorrow, the management, I would love to hear from you, because I am very interested in this Company and I want to be able to translate that to my clients; because they are going to see the price tomorrow and I would like to get to know the management and bring them to New York. You know, next time you come, if you could set that up, Jing.

Jing Wu

Thank you. I can keep in touch with you, all right?

Joe [Apamueller]

Yes. Thank you, you guys, and I am behind you 100%.

Jing Wu

Thank you so much. We will take the next question, please.

Operator

Thank you.

(Operator Instructions) The next question is from [Andrew Gaudy] from DAM. Please go ahead.

Andrew Gaudy - DAM

Hi, guys, I actually have three questions. The first question is your investment in Moloon. I notice that you actually sold some of your position, the preference shares, $1.25 million worth? Can you talk about the rationale behind that, making the investment and then selling out a piece of your stake?

Sam Qian

Actually, we are the largest shareholder in this company, but actually, last month, a strategic investor came in and they wanted to invest in the company. The rest of the shareholders want to bring them in, and they want to basically dilute the product, so the Company agreed, at a premium.

Andrew Gaudy - DAM

At a premium? So the valuation was done at a premium to when you invested in?

Sam Qian

Yes, that is right. The Company decided to say yes.

Andrew Gaudy - DAM

Okay, good. The second question is just regarding the core business. It seems like the last five or six quarters I have been following the Company, it seems like you have been talking about the downturn in the markets over there in China affecting your core business. Now you are talking about you are seeing some of that turn back around. Can you talk a little bit about your outlook over the next two or three quarters? If things are turning, do you expect there to be sequential growth now going forward again in the core business? Not advertising, just the core business.

Sam Qian

Just hold on, let me translate that to the CEO.

Zhiwei Zhao

Translation

As a principle of the Company, we do not give our estimates or forecasts for the future. From an operating perspective of our Company, including the increase of the new and repeating subscribers, I myself have the confidence about the growth of the Company. Thank you.

Andrew Gaudy - DAM

One last question is in regard to the ad business. Do you expect that business now to be a larger portion of the total revenue? Is that where you are going to spend more of your efforts and focus on? Is on the growth of the advertising business? Because that is really the business that is growing pretty rapidly year-over-year. You know, 180% in Q1 year-over-year, 215% in Q4 year-over-year -- is that part of the strategy, to refocus your strategy in terms of trying to grow the ad piece of the business?

Zhiwei Zhao

Translations

China Financial Online has always positioned ourselves as the financial information provider of the Chinese market. But with regard to the revenues from the advertising business, [the demand] to reach our revenues, we will adjust the balance between the advertisements and also the promotion of our own services and products, following the macro environment. I think this is a long-term period. Thank you.

Andrew Gaudy - DAM

One last question, you talk about insider stock being around 50% of the fully diluted shares. Where was that number at the beginning of Q1?

Sam Qian

Actually, to my knowledge, the top three shareholders have not sold any shares in the past, so I do not think that has changed.

Andrew Gaudy - DAM

Okay, so from an insider shareholding standpoint, that number has not changed at all, there has not been related parties that have increased their stake in the business to push that up north of 50%?

Sam Qian

Actually, I think the number, the total percentage is slightly different because of the dilution, because we issued stock options.

Andrew Gaudy –DAM

So there haven’t been any large shareholders who have been involved in Q1 that have increased their stake as a related party?

Sam Qian

Not to my knowledge.

Andrew Gaudy –DAM

Great, well I appreciate it. Good luck, and we will talk soon.

Sam Qian

Thank you.

Operator

Our next question comes from Dick Wei – JP Morgan.

Dick Wei – JP Morgan

Good morning, guys. I have a couple of questions. The average subscription fee for the last quarter and the decline of that; which quarter did you reduce the price?

Sam Qian

Dick, we can barely hear you. Let me repeat it. Your question is, what quarter did we have a lower ASF?

Dick Wei – JP Morgan

Yes, exactly.

Jing Wu

Dick, do you mean that we have a different ASF? You wonder – we didn’t catch your question.

Dick Wei – JP Morgan

I wonder which quarter or which specific products that you reduced the subscription fee for the repeated subscriptions?

Jing Wu

We didn’t reduce it on a particular product, but we are offering different packages. Sometimes you can buy packages, two or three products as a package at a discounted price.

Dick Wei – JP Morgan

Okay, great. Earlier in the call you mentioned that if the stock market potentially rebounds from the current level that you will offer more opportunistic products. Can you tell us a bit about what those products are?

Jing Wu

Dick, do you mean the Company’s plan for following the recovery of the market?

Dick Wei – JP Morgan

What is the product pipeline going into the year? What are the new products, if any?

Zhao Zhiwei

Translation

As I indicated in my speech, our Company has put more efforts in the marketing area, following the recovery of the market. Following the markets, we are in the development and upgrading of our new products and the current offerings. I think that we will have more new ones come out to the market.

We aim to provide a more comprehensive and useful analysis tools and information points to our Chinese individual investors. Thank you.

Dick Wei – JP Morgan

I also remember that you guys were distributing some of the personal finance management software through [institutions in] China and some banks. I wonder how that initiative is coming along?

Jing Wu

I am going to translate to our CEO.

Zhao Zhiwei

Translation

About personal finance, our strategy for personal finance is to occupy the market first and increase our customer base. About the distribution channels with the institutions, we have to actually get some practice and positive results from this kind of a cooperation. We are actually following the data and tracking and analyzing the feedback. Thank you.

Dick Wei – JP Morgan

My last question is, who are some of your largest online advertisers on your website? By industry or by the Company?

Zhao Zhiwei

Translation

On advertisements, we are mostly working with the agencies instead of actually working with direct advertisers.

Dick Wei – JP Morgan

Any particular industry? Is it banks or IT products?

Zhao Zhiwei

Translation

Currently the industries are finance, auto and IT.

Dick Wei – JP Morgan

Great, thanks a lot.

Jing Wu

Thank you. Operator, we are going to conclude today’s conference. If you still have further questions, our IR staff, including myself, can be reached at 8610-6621-0425 and our email address is ir@jrj.com. Ladies and gentlemen, thank you very much for joining us today.

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