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China Finance Online Company (NASDAQ:JRJC)

F4Q 2012 Earnings Conference Call

April 11, 2013 8:00 PM ET

Executives

Shiwei Yin – IR

Zhiwei Zhao – CEO

Jun Wang – CFO

Analysts

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the JRJC’s Q4 2012 earnings 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, Friday 12 April, 2013.

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

Shiwei Yin

Thank you, Beverly. Thank you for joining us today and welcome to China Finance Online’s 2012 Fourth Quarter Financial Results conference call and webcast.

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 the Private Securities Litigation Reform Act of 1995. The words believe, estimate, plans, 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 and these statements are based on current expectations or beliefs, including, but are not limited to statements concerning China Finance Online’s operations, financial performance and condition. China Finance Online cautions that these statements by their nature involves 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 forward-looking information in the future.

I would now turn the call over to Mr. Zhiwei Zhao, Chairman and CEO of China Finance Online for prepared remarks.

Zhiwei Zhao

[Foreign Language – Chinese]

[Interpreted]

Hello everyone, thank you for joining us today. In 2012, the Chinese stock market continued to underperform global indices and showed strong volatility at times, from peak to 12, the Shanghai Composite Index dropped by more than 20% during the year, while trading volume in annual loads saw their worst levels since the financial crisis. A recent report targeting entrepreneurs’ institutionally individual investors in Shanghai indicated a rapid decrease in the confidence of institutional investors in the fourth quarter, while the Satisfaction Index for retail investors decreased to a historic low.

[Foreign Language – Chinese]

[Interpreted]

While the external environment remains challenging, we continue to proceed with our strategic transition, diversifying our product offerings, investing in core internet capabilities and streamline operation to position ourselves for the next stage of growth.

[Interpreted]

[Foreign Language – Chinese]

While transitioning our business domestically, we are also seeking to gradually scale up our financial services outside of Mainland China. By February of this year, we have re-branded our oversea financial platform to unify brand identity and strengthen the recognition of our flagship portal site stockstar.com. In addition to our offerings in Hong Kong market, we’re also launching the international avenue [ph] for future trading services to satisfy the various investment demands of our customers. iSTAR Finance is proactively diversifying its business to ensure healthy and stable growth despite the continue in the Hong Kong stock market volatility.

[Foreign Language – Chinese]

[Interpreted]

Now let me share with you some progress that we have made to enhance our core internet capabilities and expand the influence of our financial media platforms, starting from 2013, jrj.com and stockstar.com opened the real-time trading forecast. And this platform allows the investors to interact directly with the professional investment advisors and transfers investment ideas in real-time via multimedia channels. Currently the platform has over 700 broadcast channels for stock trading and precious metal trading, and since inception, the total number of visitors has exceeded four million.

[Foreign Language – Chinese]

[Interpreted]

In addition, we continue to expand the influence of our financial media platform and building relationships with various institutions and individual investors through hosting high profile industry events. For example, on January 11, 2013 we hosted the leading China 2012 Financial Industry Innovation and the (inaudible) Forum to share ideas on current development and future growth with industry leaders from banking, insurance, mutual fund, securities, trust, futures, precious metals and foreign exchange backgrounds.

Over 500 distinguished guests and nearly 200 companies attended this forum. After the positive reception, we look forward to continue hosting these events and events like this in the future.

[Foreign Language – Chinese]

[Interpreted]

We continue to see signs of stabilization in our financial position and anticipate further improvement in 2013. We continue to remain confident in the long-term prospect of our business as the number of high net worth individuals in the middle-class in China continues to rise at a fast pace. We’re tapping to both existing and new sources to build up the infrastructure, product offerings and human network needed for future solid growth. We appreciate your continuous support in China Finance Online.

[Foreign Language – Chinese]

[Interpreted]

Lastly, Mr. Kiang Dalaroy resigned as the Chief Strategy Officer of the company for personal reasons. We are grateful for Dalaroy’s service to the company over the years and wish him well in his future endeavors.

[Foreign Language – Chinese]

[Interpreted]

Now I will turn over the call to Mr. Jun Wang, Chief Financial Officer to give an overview of our financials. Thank you.

Jun Wang

Thank you, Zhiwei. Let’s briefly review our fourth quarter and 2012 full-year financial results. All financial numbers presented today are in US Dollars and rounded to one decimal point for approximation.

Our net revenues for the fourth quarter were US$5.2 million compared with US$10.8 million a year ago. Subscription service fees from individual customers, and subscription fees from institutional customers, advertising revenues and revenues from iSTAR Finance, contributed 53%, 14%, 22% and 11% to total revenues respectively, compared with 65%, 7%, 19%, and 8%, respectively a year ago.

Revenues from subscription fees paid by individual customers decreased 61% year-over-year to US$2.7 million. The decrease is largely due to the company’s previously disclosed strategic transition and the sluggish Chinese stock market. Institutional subscription revenues decreased 4% year-over-year to US$0.7 million. Revenues from advertising were US$1.1 million, compared with US$2.1 million in the fourth quarter of 2011. Revenues from iSTAR Finance were US$0.6 million, compared with US$0.9 million a year ago.

For the fourth quarter of 2012, gross profit was US$3.4 million, compared with US$8.7 million in the fourth quarter of 2011. Gross margin for the fourth quarter of 2012 was 65.5% compared with 80.8% for the fourth quarter of 2011. The year-over-year decrease in gross margin was mainly due to lower revenues.

G&A expenses for the fourth quarter of 2012 were US$3.1 million, or 59.8% of net revenues, compared with US$2.7 million, or 25.5% of net revenues a year ago. The increase in G&A expenses in absolute value and as a percentage of quarterly revenues was mainly due to the increase in professional service fees and office rent.

Sales and marketing expenses for the fourth quarter were US$3.2 million, compared with US$4.5 million in the fourth quarter a year ago. The decrease in sales and marketing expenses in absolute value was due to lower marketing expenses and sales commissions.

Product development expenses for the fourth quarter were US$2.2 million, compared with US$3.4 million, a year ago.

Total operating expenses for the fourth quarter were US$8.5 million, down from US$25.8 million which included a loss from impairment of intangible assets and goodwill in fourth quarter of 2011. We continue to focus on stringent cost controls in our overall business operation while also making a steady progress on our new initiatives.

Net loss attributable to China Finance Online for the fourth quarter of 2012 was US$4.9 million, compared with a net loss of US$15.4 million in the fourth quarter of 2011. Both basic and diluted weighted average number of ordinary shares in the fourth quarter of 2012 was 109 million.

Total net revenues for the fiscal year ended December 31, 2012 were US$29.6 million, compared with US$53 million a year ago. Gross profit for fiscal year 2012 was US$21.5 million, compared with US$44.2 million a year ago.Net loss attributable to China Finance Online for the fiscal year 2012 was US$11.9 million.

Now let me walk you through our financial position. As of December 31, 2012, total cash, cash equivalents and restricted cash were US$69.8 million and short-term investments were US$2.6 million. Accounts receivable in non-margin related business were US$5 million while iSTAR Finance had margin-related accounts receivables of US$15.1 million.

In March of this year, in order to enhance our return on cash, the company’s Board of Directors approved and authorized the company’s participation in a real estate project in Langfang City of Hebei Province. Based on the agreements, we will own 49% of equity interest of Langfang project with a consideration of RMB135 million at closing. Total China Finance Online Company Limited shareholders’ equity was US$80 million as of December 31, 2012.

The combined current and non-current deferred revenues at the end of the fourth quarter of 2012, which represented prepaid subscription fees from individual customers that have not been rendered as of December 31, 2012, were US$10.7 million.

With that operator, we are ready to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we’ll now begin the question and answer session. (Operator Instructions). Your first question comes from Alex Hamel [ph]. Please ask your question.

Unidentified Analyst

Yes, hello, that was a very nice presentation. I had a question. Can you tell us a little more about Langfang Shengshi?

Jun Wang

Hi, thank you Alex. Well I will start off by saying that the purpose of such investment is to enhance the return of our liquid capital. So down the road we’ll stick to save our state for investment return and have no plans of engaging in real estate project as part of our operations. And now let me give you some background information on this project. Located near the central area of Bohai economic circle, in the greater Beijing metropolitan area, this project actually will be the first government style [ph] upscale residential project in Langfang City of Hebei Province. And the project is only 12 kilometers away from the new Capital International Airport, which is already under construction. And that is 80 kilometers from the current Beijing Capital International Airport and 100 kilometers from the Port of Tianjin with excellent location of access.

And in late March this year, the Board of China Finance Online approved company’s purchase of 49% from the Shengshi, this rented project which is developer of this project for consideration of RMB135 million. The fund will be mainly used for the payments of land transfer and offer the project liquidity. The development of the Langfang City of this project in a state-owned construction land of about 400,000 square meters have been approved by the Hebei Provincial Department of Land and Resources. So this is actually the basic information that I can provide to you, Alex.

Unidentified Analyst

Could you also tell a little more about re-branding of Daily Growth?

Jun Wang

Sure, Daily Growth has been actually our overseas brokerage business based in Hong Kong. We have re-branded our – this Hong Kong brokerage business division to unified brand identity with our flagship financial media platform iSTAR and to strengthen the brand recognition from our investors. We also brought in a new professional team specifically to develop financial services outside Mainland China.

And this in Hong Kong, iSTAR Finance was providing a security trading, futures trading and security advisement services despite the gradual pickup of Hang Seng Index at the end of 2012, the investors are confidence in Hong Kong stock market remain in their reach [ph]. Again with this background, we are cautiously optimistic on the recovery of Hong Kong market in 2013 and iSTAR Finance has been proactively exploring other international equities market and to provide our clients with a more comprehensive basket of securities and future brokerage services. And this will allow our clients to trade on Hong Kong and other international markets down the road. Thank you.

Unidentified Analyst

Thank you very much.

Operator

Thank you. Your next question comes from Kevin Vincent [ph], please ask your question.

Unidentified Analyst

Hi, yes, I had a question. Why did your professional fees increase after switching the Grant Thornton?

Jun Wang

Well that’s a good question, Kevin, thank you. Well you are right, switching to Grant Thornton late last year was really driven by the fee considerations to control costs in the long run. However during the handover period we must pay Deloitte and Grant Thornton for both firms for auditing and reviewing our books and finance, and China Finance Online compliance with the Securities laws and regulations of countries we’re operating in and so we hope that double auditing and reviewing by two top ranked independent audit firms should eliminate any redundant, mainly in regards to integrity of financial operations. Besides other professional service fees overtime we are trying hard to keep our costs in professional fees under control. Thank you.

Unidentified Analyst

Okay, I had a second question please. What’s your outlook for the cash position for 2013?

Jun Wang

Regarding our cash position, we will continue to expect improvement in our cash position in 2013. In our right hand, we continue to focus on stringent cost controls in our overall business operations and at the same time also will make steady progress on our new initiatives. And on the other hand, we anticipate that some of the securities advisory and even wealth management business will contribute more to our bottom line in the second half of this year. However due to the ongoing uncertainties in the global economy and also the sluggish Chinese stock market, the improvement in cash flow maybe limited at this stage.

It has macroeconomic and margin improvements for the potential challenges for ongoing operations, so therefore ample cash position remains a cornerstone for our operational stability in the current environment. Thank you.

Unidentified Analyst

Thank you.

Operator

Thank you. As there are no further questions at this time, I would now like to hand the conference back to our presenters, please continue.

Shiwei Yin

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

Operator

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

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