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China Finance Online Co. Limited (NASDAQ:JRJC)

Q4 2013 Earnings Conference Call

April 3, 2014 8:00 p.m. ET

Executives

Shiwei Yin – IR, Grayling

Zhiwei Zhao – CEO

Jun Wang – CFO

Analysts

Operator

Ladies and gentlemen, thank you for standing by and welcome to the JRJC Fourth Quarter 2013 Earnings Call.

[Operator Instructions] I must advise you that this conference is being recorded today, Friday, the 4th of April, 2014.

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

Shiwei Yin

Thank you, Annie [ph]. Thank you for joining us today.

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, 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. 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. As usual we will conduct a question-and-answer session at the end of our presentation. Mr. Zhao, please proceed.

Zhiwei Zhao

[Interpreted] Thank you. Hello everyone.

We're very pleased to announce that our fourth quarter revenues reached a record-high of $25.8 million, an increase of 400% over last year and an increase of 96% compared to the third quarter. We also returned to profitability for the first time in 11 quarters.

After three years of consolidation, our strategic transition has finally taken shape, and with a sluggish Chinese stock market, we took advantage of our internet capabilities to develop internet-based financial services, providing investors with a variety of invest options, including precious metal trading. Proportionally, revenues from financial information and the investment advisory business are going down and revenues from new businesses including financial service have increased dramatically. New business has entered into a growth phase and has become the new growth engine of the company.

What we achieved recently is a direct result of our consistent investment in the website and our solid customer base. Over the years we have focused on improving our business fundamentals and continuously enhancing our core competitiveness in internet capabilities. Our two main portals, JRJ.com and StockStar.com, have remained very popular among investors. Our sales and marketing team is one of the most effective in the industry. We believe that our massive user base, innovative financial products, and seasoned customer service professionals will continue to serve as the differentiating advantages for us to compete in internet financial information and financial service areas.

With ongoing financial reform in China, internet-based financial services have tremendous potential for growth. We will leverage our long-developed user base to further explore potential market opportunities. Given that these new businesses are still in the beginning stage, we will advance prudently to ensure healthy and sustainable growth.

On behalf of JRJC, I want to thank our loyal customers, staff and partners for their continued support, as well as the investors who have stood by us through thick and thin. Last month our stock was included in the NASDAQ Golden Dragon Index and the NASDAQ OMX China Technology Index, indicative of the capital markets acknowledgement of our company.

Adhering to our model of making investment simpler, going forward we will strive to build a high-quality online investment platform for the massive users of our two websites. We will continue to innovate, improve user experience, and roll out new financial products to meet the needs of our customers.

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

Jun Wang

Let me first review our fourth 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 fourth quarter of 2013 increased by 400% year over year to $25.8 million from $5.2 million in the fourth quarter of 2012, and up 96% quarter over quarter from $13.2 million in the third quarter of 2013. As previously stated, we've re-categorized the components of our net revenues to better reflect the evolving nature of our businesses since the second quarter of 2013.

Specifically, our net revenues have been re-categorized under: (a) revenues from financial information and advisory business, which include subscription fees from individual customers and institutional customers; (b) revenues from financial services, which include Hong Kong brokerage-related revenues and our precious metal trading service; and (c) advertising revenues.

During the fourth quarter of 2013, revenues from financial services, revenues from financial information and advisory business and advertising revenues each contributed 76%, 11% and 10% of the total revenues, respectively, compared with 11%, 67% and 22%, respectively, for the fourth quarter in 2012.

Revenues from financial services were $19.7 million compared with $0.6 million in the fourth quarter of 2012, and up from $8.9 million in the third quarter of 2013, mainly driven by better operating performances in precious metal trading service. Revenues from the financial information and advisory business were $2.9 million compared with $3.5 million in the fourth quarter of 2012, but up from $2.8 million in the third quarter of 2013. Revenues from advertising were $2.5 million compared with $1.1 million in the fourth quarter of 2012, and up from $1.2 million in the third quarter of 2013.

Our gross profit increased by 531% year over year to $21.3 million from $3.4 million for the fourth quarter of 2012, and up 88% from $11.4 million in the third quarter of 2013. Gross margin for the fourth quarter of 2013 was 82.7% compared with 65.5% a year ago and 86.4% in the third quarter of 2013. The decrease in gross margin on a sequential basis was mainly due to the increase in commission rebates paid to the sales agents of our precious metal trading business.

G&A expenses for the fourth quarter were $5.3 million or 20.4% of net revenues, compared with $3.1 million or 59.8% of net revenues for the fourth quarter in 2012, and $3.9 million or 29.6% of net revenues for the third quarter of 2013. The increase in G&A expenses in absolute value was mainly due to higher share-based compensation expenses.

Sales and marketing expenses for the fourth quarter of 2013 were $15.5 million or 60.1% of net revenues, compared with $3.2 million or 61.6% a year ago and $7.4 million or 56.4% in the third quarter of 2013. The increase in sales and marketing expenses was mainly due to higher headcount related expenses and marketing expenses.

Product development expenses for the fourth quarter of 2013 were $2.2 million or 8.6% of net revenues, compared with $2.2 million or 42.7% of net revenues a year ago, and $2.4 million or 18.1% of net revenues in the third quarter of 2013. The company expects to continue to invest in its data, product and technical capabilities to achieve the company's long-term strategic plan.

Total operating expenses for the fourth quarter of 2013 were $23 million, compared with $8.5 million a year ago and $13.7 million in the third quarter of 2013.

Net income attributable to JRJC for the fourth quarter of 2013 was $1.6 million, compared with a net loss of $4.9 million in the fourth quarter of 2012 and a net loss of $1.6 million in the third quarter of 2013. During the fourth quarter of 2013, the company sold its investment in a real estate project at an investment gain of $2.8 million. Basic and diluted weighted average number of ordinary shares in the fourth quarter of 2013 were 109 million and 119 million, respectively. Each ADS represented five ordinary shares of the company.

On an annual basis, total net revenues increased by 76% year over year to $52.1 million from $29.6 million in fiscal 2012. Gross profit increased by 93% year over year to $41.5 million from $21.5 million in fiscal 2012. Gross margin was 79.7% for the fiscal year 2013. Net loss attributable to JRJC for 2013 was $8.8 million.

Now let me walk you through our financial position. As of December 31, 2013, total cash and cash equivalents were $36.4 million. Accounts receivables from the non-margin related business were $15.4 million, while iSTAR Finance had margin-related accounts receivables of $6 million.

The total shareholders' equity of China Finance Online was $75.6 million as of December 31, 2013.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Your first question comes from the line of John Block [ph]. Please ask your question.

Unverified Participant

First of all, congratulations on this fantastic quarter. You mentioned your revenue is up about 400% year over year and almost doubled from Q3. What is the growth driver? And is it sustainable?

Jun Wang

Well, the growth of the revenue is really from actually the new service we just released in the past year. And as you know, the Chinese stock market has been very weak since the financial crisis and the Shanghai A-share index ended the year down nearly 7%. And it's the fourth consecutive year that Asia index significantly underperformed its global peers and it's down by I think around 36% since end of 2009. So naturally more and more investors actually are looking for -- or in terms of the investment opportunities.

So in order to address this demand, we established new subsidiaries and service lines to help our clients trade precious metals online and also provide other services such as mutual fund distribution.

We're glad to see that our services have gained popularity among investors. And so our - in the fourth quarter in 2013, the precious metal trading has become the major driver of our revenues. But this actually is still a new business. We're working hard on all fronts and also make additional disclosures when appropriate.

But having said that, we believe in the longer term, you know, for precious metal trading services and other related financial services have great potential in China and with solid sustainability. But still this new business is in its early stage, is also subject to government policy changes. But we're actually working hard to drive the growth of our business. Thank you.

Unverified Participant

Great. Can you also say something how you compete with Alibaba's Yu'E Bao.

Jun Wang

Yes. Well, for -- in China, the internet finance based services actually is a very -- the market size is enormous, and different companies such as Alibaba, actually we're targeting different groups of customers, clients. And compared to other internet portals, we actually operate vertical [ph] financial media websites, JRJ.com and StockStar.com, and so we are -- our customers and users are mostly affluent individual investors. We have accumulated a large number of them over the past years.

What we need to do is really to leverage on our core strength in internet capabilities and also our innovative -- to be innovative actually in our product and service, really to create a fully integrated investment ecosystem and sifting financial information, marking the data into investment analysis and decision-supporting tools and also actually trading platforms. And our goal is really to make investment simpler and more intuitive for more investors. So in this -- so actually we're more focused and more specialized to serve the affluent and individual investors in China. So this actually -- will actually make us unique -- provide unique offerings compared with the Yu'E Bao and similar products offered by Alibaba and other major portals. Thank you.

Operator

Your next question comes from the line of Kevin Vincent [ph]. Please ask your question.

Unverified Participant

Yes. The concept of internet finance has attracted a lot of attention since last year. What do you think this is all leading to?

Jun Wang

Well, thank you for your question. So as the Chinese investors' disposable income continues to grow in the years, and so these investors are looking for more diversified ways to invest their wealth. And the reason why internet-based financial products and services have gained so much popularity is because there are satisfying investors' pent-up demand for alternative financial investment. And we believe internet-based financial solutions will become the norm for people to manage their wealth in the future.

So our only goal is to make investment easier by users through various investment options and highly-capable platforms and high-quality services. Thank you.

Unverified Participant

Also the Chinese government is expected to strengthen the supervision and regulation of internet finance and has recently implemented a policy to limit the amount allowed via third-party payments. How will this impact your business?

Jun Wang

Well, you know, riding on the back of a robust customer demand, internet finance really is here to stay and is expected to grow tremendously down the road. And Premier Li Keqiang of the Chinese government has expressly mentioned that during the National People's Congress and also the Chinese People's Political Consultative Conference, that the government supports the development of internet finance. So we see this as a green light for the government.

So we are confident about the macro change of internet finance in China. And at the same time, we're also -- we also recognize that internet finance in China needs to go through a healthy process of development. For example, fund safety, information security and national financial infrastructure are the cornerstones making up the mature internet financial ecosystem.

So, strengthening the supervision and the regulation by the government will help create a sustainable internet financial industry in China in the long run and benefit users in leaving only the most qualified, top providers. Thank you.

Unverified Participant

Thank you.

Operator

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

Shiwei Yin

Thank you all for participating in this earnings call and webcast. We look forward to speaking with you again. And have a good day.

Operator

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

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