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China Finance Online Co. (NASDAQ:JRJC)

F3Q 2013 Earnings Conference Call

January 02, 2014, 08:00 PM ET

Executives

Shiwei Yin - Grayling, Investor Relations

Zhiwei Zhao - Chief Executive Officer

Jun Wang - Chief Financial Officer

Analysts

Operator

Ladies and gentlemen, thank you for standing by and welcome to the JRJC Third Quarter 2013 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, the 3rd of January, 2014.

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

Shiwei Yin

Thank you, Shiweya, and thank you everyone for joining us today.

Before we begin, I would like to remind all listeners that throughout this call we may present statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, estimate, plan, expect, anticipate, project, target, optimistic, intend, aim, future, will, or similar expressions are intended to identify forward-looking statements.

All statements other than historical facts may be deemed forward-looking statements. These forward-looking statements are based on current expectations or beliefs, including, but not limited to statements concerning China Finance Online’s operations, financial performance and condition.

China Finance Online cautions that these statements by their nature involve risks and uncertainties and actual results may differ materially depending on a variety of important factors, including those discussed in China Finance Online’s reports filed with the Securities and Exchange Commission from time-to-time. China Finance Online specifically disclaims any obligation to update any forward-looking information in the future.

I will now turn the call over to Mr. Zhao for prepared remarks. Mr. Zhao, please proceed.

Zhiwei Zhao

Thank you, everyone. We made solid progress in our business fundamentals in 2013. After three year of consolidation we are starting to turn things around amid a challenging market environment. Our revenues grew on a sequential basis for three consecutive quarters and net loss has been trending lower. In addition we also achieved progress in consolidating and integrating with the complementary industry resources.

Within a sluggish stock market we are further developing an Internet-based finance business capitalizing on our robust Internet capabilities. We established new brokerage services such as the growing precious metal trading business. We also laid the foundation for our new wealth management service, such as Yinglibao, which is an online financial service platform that integrates cash management and mutual fund distribution. After a successful trial run Yinglibao has formally launched service. Over time Yinglibao will enhance its services and develop new products to become a one-stop-shop where customers can access a variety of investment products.

In 2014 we intend to enhance our core competitiveness through services and reestablish our vision for growth around 'Let’s make investment easier' for our clients and users. Leveraging our strong Internet capabilities we are creating an online investment platform that is intuitive and easy to operate for our massive user base. Focusing on innovation and user experience we are introducing diverse and high quality investment products to service our growing customers and users of our flagship web portals.

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

Jun Wang

Thank you. Now let me first review our third quarter 2013 financial results. All financial numbers are presented in US dollars and rounded to one decimal point for approximation.

Our net revenues for the third quarter were US$13.2 million compared with US$7.2 million for the third quarter of 2012 and up from US$7.6 million for the second quarter of 2013. Recently we have recapitalized the components of our net revenues to better reflect the evolving nature of our business. Our net revenues are now categorized under: A, revenues from financial information and advisory business, which include subscription fees from individual customers and institutional customers; and B, revenues from financial services, which includes brokerage-related revenues in our recently launched precious metal trading services; and C, advertising revenues.

During the third quarter of 2013 these segments of business each contributed 21%, 68% and 9% of total revenues respectively, compared with 66%, 10% and 24% for the third quarter in 2012. Revenues from financial information and advisory business decreased 40.6% year-over-year to US$2.8 million, that’s up from US$2.5 million in the second quarter of 2013. Revenues from financial services were US$8.9 million compared with US$0.7 million one year ago, and up from US$3.3 million in the second quarter of 2013.

Revenues from advertising decreased 31% year-over-year to US$1.2 million from US$1.7 million in the third quarter of 2012. Our gross profit was US$11.4 million compared with US$5.5 million for the third quarter in 2012, and up from US$5.2 million in the second quarter of 2013.

Gross margin for the third quarter of 2013 was 86.4% compared with 75.5% for the third quarter of 2012, and 67.9% in the second quarter of 2013. G&A expenses were US$3.9 million or 29.6% of net revenues, compared with US$2.9 million or 40.6% of net revenues for the third quarter in 2012, and $3.2 million, or 41.5% of net revenues for second quarter of 2013. The increase in G&A expenses in absolute value was mainly due to higher recent rent and headcount-related expenses.

Sales and marketing expenses were US$7.4 million, or 56.4% of net revenues compared with US$3.1 million, or 42.4% in the third quarter of 2012 and US$4.5 million, or 59.6% in the second quarter of 2013. The increase in sales and marketing expenses in absolute value was mainly due to expenses associated with higher labor costs and sales commissions.

Product development expenses were US$2.4 million, or 18.1% of net revenues, compared with US$2.6 million, or 36.4% of net revenues for the same quarter in 2012, or US$2.2 million, or 29.2% of net revenues in the second quarter of 2013. We continue to invest in data, product and technical capabilities for the long run.

Total operating expenses for the third quarter of 2013 were US$13.7 million, compared with US$8.6 million in the third quarter of 2012, and US$9.9 million in the second quarter of 2013.

Net loss attributable to China Finance Online was $1.6 million, compared with a net loss of US$3.2 million in the third quarter of 2012, and a net loss of US$4.5 million in the second quarter of 2013. On a nine months basis total net revenues were US$26.3 million compared with US$24.4 million in the first nine months last year.

Gross profit for the first nine months of 2013 was US$20.2 million compared with US$18.1 million in the same period last year. Gross margin was 76.8% for the first nine months of 2013. Net loss attributable to the company for the first time -- first nine months of 2013 was US$10.4 million.

Now let me walk you through our financial position. As of September 30, 2013, total cash and cash equivalents were US$21.8 million and short-term investments were US$9.5 million. Accounts receivable from the non-margin related business was US$14.1 million while iSTAR Finance had margin-related accounts receivables of $3.2 million.

As a result of our participation in the real estate project, the long-term investment was US$22.8 million as of September 30, 2013. China Finance Online total shareholders' equity was US$70.9 million as of September 30, 2013. With that operator, we are ready to begin the Q&A session.

Question-and-Answer Session

Operator

Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Kevin Vincent. Please ask your question.

Unidentified Analyst

Thank you. In light of the recent improvement in your business fundamentals do you think this trend will continue going forward?

Jun Wang

Well, thank you for question. You can see from our release that our top-line has been increasing for three quarters in a row on a sequential basis, and most of that growth comes from financial services, which include brokerage-related revenues and our recently launched precious metal trading service. And the Chinese stock market underperformed again in 2013 in a year that S&P gained 29%, Wuxi up 16% and Nikkei [inaudible], [Shaw High Composites] actually declined by 10%.

So amid such a weak domestic stock market Chinese investors are safeguarding their rising personal wealth by seeking alternative investment opportunities. So in that sense by leveraging our solid international ability and tremendous user base we proactively rolled out precious metal trading and also our wealth management service platform, Yinglibao to address investors’ evolving needs. And since launch both services have been well received by customers and quickly picked up our growth momentum. So our goal in the New Year is to further manage the growth of these business segments and also we intend to initiate further cost cutting measures as needed. Thank you very much.

Unidentified Analyst

Thank you. I have a second question for you. Can you tell us a little more about the wealth management landscape in China?

Jun Wang

Well sure. We believe the wealth management industry has actually tremendous market potential in China. Actually according to, actually a research report issued by [Beckman] Consulting Group and also the China Construction Bank, one of the leading banks in China, after more than 20 years capital accumulation in China at the end of 2012, the number of individuals investable assets was forecasted to have reached to more than RMB73 trillion and high net-worth individuals investable assets was forecasted to have reached RMB33 trillion with a capital growth rate of more 10% and such pace is expected to continue in the near future.

However industries that are serving this growing affluent population are just emerging. And to give you xamples on the increasing popularity of wealth management products the industry’s bank financial products increased from RMB 5 trillion in 2009 to over RMB 15 trillion in 2011 with a cap rate exceeding 73%. And over the next decade also we believe the market demand is expected to remain robust and such including significant increase, the growth potential of our business in the long run. Thank you for the question.

Unidentified Analyst

Thank you.

Operator

There are no further questions at this time. I would now like to hand the call back to Mr. Shiwei Yin. Please continue.

Shiwei Yin

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

Operator

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

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