China Finance Online's (JRJC) CEO Zhiwei Zhao on Q1 2014 Results - Earnings Call Transcript

Jun.20.14 | About: China Finance (JRJC)

China Finance Online Co. Limited (NASDAQ:JRJC)

Q1 2014 Earnings Conference Call

June 18, 2014 8:00 p.m. ET

Executives

Yin Shiwei – IR, Grayling

Zhiwei Zhao – CEO

Jun Wang – CFO

Analysts

Operator

Ladies and gentlemen, thank you for standing by and welcome to the 2014 Q1 Earnings Conference Call.

[Operator Instructions]

I must advise you that this conference is being recorded today, Friday, 20th of June 2014.

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

Yin Shiwei

Thank you, Wei [ph], and thanks everyone 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 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

Xie-xie.

[Interpreted] Hello everyone. We are pleased to announce that our business transition continues to take hold as our first quarter revenues reached $23.2 million. This represents an increase of 321% over last year and is also higher than the $21 million that we pre-announced.

First, let me briefly update you on the investment landscape for individuals in China. The Chinese stock market continues to underperform many of its global peers. During the first quarter, the Shanghai A share index declined by 3.9% and Hong Kong Hang Seng index declined by 4.7%, whilst S&P500 index and Europe's top 50 index gained 1.3% and 3.3%, respectively, during the same period. Meanwhile the increase in home sales and housing price have been taking breaks since the beginning of the year. The return on bank deposits is not keeping up with erosion in purchasing power as a result of inflation.

Therefore, our new businesses such as precious metals trading and Yinglibao cash management and mutual fund distribution are fundamentally addressing the demand of Chinese investors for alternatives in an environment where conventional investment vehicles are less attractive, leveraging on our massive user base and industry-leading customer specialist team. We have quickly gained customers and established ourselves as a premier provider of new online financial services in China.

The ongoing financial reform continues to improve transparency, whilst fostering innovation in China's financial service industry. Beijing recently approved a pilot program for direct stock trading between Hong Kong and Shanghai. New revelations aimed at standardizing the rapid growing internet finance space are also expected to come online. As industry leader, we will continue to explore the opportunities from these changes.

Last but not least, I'm pleased to announce that Mr. David Tan [ph] has joined us as VP of Strategy and Finance, bringing a wealth of experience in capital markets and operation. David will be responsible for strategic developments and communication with our investors. Prior to joining us, David served as CEO and Chief Strategy Officer for a number of U.S. and Hong Kong Chinese companies and started his financial career as an analyst at Merrill Lynch New York. On behalf of our colleagues, I welcome David to China Finance Online and look forward to working with him.

Now I will turn the call over to Jeff [ph] to review our first quarter financials. Thank you.

Jun Wang

Thank you, Zhao-gong [ph]. First, let me review our first quarter 2014 financial results. All financial numbers are presented in U.S. dollars and rounded to one digital point for approximation.

Our net revenues for the first quarter increased by 321% year over year to $23.2

million from $5.5 million a year ago, and compared with $26.5 million in the fourth quarter of 2013.

Our net revenues are categorized under, A, revenues from financial services, including Hong Kong brokerage-related revenues and our precious metal trading service; B, revenues from financial information and advisory business, including subscription fees from individual customers and institutional customers; and C, advertising revenues. During the first quarter, revenues from financial services, financial information and advisory business and advertising each contributed 78%, 14% and 8% of the total revenues, respectively, compared with 17%, 53% and 26%, respectively, a year ago.

Revenues from financial services were $18 million, compared with $0.9 million in the first quarter of 2013 and $20.4 million in the fourth quarter of 2013. The year-over-year increase was mainly driven by better operating performances in the precious metal trading business. The quarter-over-quarter decrease reflected the impact of fewer trading days in the first quarter due to the long Chinese New Year holidays. Financial services continue to be a growth engine on our new business model.

Revenues from financial information and advisory business were $3.2 million, in line with $2.9 million in both the first quarter of 2013 and the fourth quarter of 2014. Revenues from advertising were $1.8 million, compared with $1.5 million a year ago and $2.5 million in the fourth quarter of 2013.

Gross profit increased by 389% year over year to $17.8 million, compared with $22 million in the fourth quarter of 2013. Gross margin was 76.8%, compared with 66.1% for the first quarter of 2013 and 83.1% in the fourth quarter of 2013. The year-over-year increase in gross margin was mainly due to the increase in revenues related to financial services.

G&A expenses were $4.0 million or 17.4% of net revenues, compared with $2.9 million or 52.7% of net revenues a year ago, and $5.3 million or 19.9% of net revenues in the fourth quarter of 2013. The year-over-year increase in G&A expenses in absolute value was mainly due to higher rent and wage expenses.

Sales and marketing expenses were $12.1 million or 52.2% of net revenues, compared with $3.1 million or 56.7% of net revenues a year ago and $15.5 million or 58.6% in the fourth quarter of 2013. The year-over-year increase in sales and marketing expenses in absolute value was mainly due to higher headcount related expenses and marketing expenses.

Product development expenses were $2.6 million or 11% of net revenues, compared with $2.2 million or 40.2% of net revenues for the first quarter in 2013, and $2.2 million or 8.4% of net revenues in the fourth quarter of 2013. We will continue to invest in data, product and technical capabilities to ensure our long-term leadership in internet capabilities.

Total operating expenses for the first quarter were $18.7 million, compared with $8.2 million in a year ago and $23 million in the fourth quarter of 2013.

Net loss attributable to China Finance Online was $2 million, compared with a net loss of $4.2 million a year ago and a net income of $1.9 million in the fourth quarter of 2013.

Now let's move on to our balance sheet. As of March end, total cash and cash equivalents were $32.1 million. Accounts receivables from non-margin related business were $14.3 million, while iSTAR Finance, our Hong Kong brokerage business, had margin-related accounts receivables of $4.3 million.

The total shareholders' equity was $73.9 million as of March 31, 2014.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

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

Unidentified Participant

Yes, hi. Could you please tell me what the impact of regulatory politics could be on your online brokerage business?

Unidentified Company Representative

Okay. The [Audio Gap] has been one of the most important financial innovation promoted by the China Securities Regulatory Commission, CSRC, since 2013. The area of online financial services is coming and it will [Audio Gap] the traditional securities industry due to the loosening of the tight grip on the policies that clients have to open up to trading [indiscernible]. The new channels of timely information, interaction and trading would expand the relatively small and emerging Chinese securities market and will provide back opportunities for industry players.

Unidentified Participant

Thank you. I have a second question please. How will the reopening of the IPO markets in China affect your business?

Unidentified Company Representative

The reopening IPO of Chinese stock market has some targeted impacts on the financial institutions such as banks, securities companies and especially for us, visits to our leading financial website may increase and so may our ad sales.

In terms of the future revenue stream, the reopening of IPO will also offer growth opportunities on our equity products such as wholesale and the wealth management product.

Unidentified Participant

Okay. Thank you.

Unidentified Company Representative

Thank you.

Operator

Thank you very much. [Operator Instructions]

Your next question comes from the line of John Black [ph] from Sugar Capital [ph]. Please ask a question.

Unidentified Participant

Yes, hello. Thank you for a wonderful presentation.

My question is, you mentioned the pilot program for direct stock trading between Hong Kong and Shanghai. Can you tell us more about that please?

Unidentified Company Representative

Sure. In April this year, the China Securities Regulatory Commission, CSRC, and Hong Kong Securities & Futures Commission, SFC, jointly announced the pilot program that would allow cross-border stock investment between Shanghai and Hong Kong after six month preparation period. At the beginning, investors in Hong Kong and Shanghai will be able to directly invest in a limited number of component stocks belonging to certain stock indices on both markets. There will also be a cap as to the value of the stocks that can be traded on daily basis.

This pilot program is expected to deepen the integration between stock markets in Shanghai and Hong Kong, to enhance the attraction [ph] and sophistication of both markets, and to establish Hong Kong as the global offshore RMB center. We believe this pilot program is a key step towards financial reform in China. We think the new pilot means greater business opportunity for us as our Hong Kong brokerage customers will be able to invest through our subsidiary iSTAR Finance in stocks traded on the Shanghai Stock Exchange for the first time.

Meanwhile, we're also assessing potential ways to capitalize on Chinese investor demands for Hong Kong stocks. With our large registered user base, we believe we're well-positioned to take advantage of opportunities from ongoing macro trends of financial reform in online financial services. Thank you.

Unidentified Participant

That sounds fantastic. Can't wait.

Operator

Thank you very much. [Operator Instructions]

There are no further questions on the line at this time. I would now like to hand the call back to today's presenter. Please continue.

Yin Shiwei

Thank you all for participating in today's conference call and webcast, and we look forward to speaking with you again soon. Thank you.

Operator

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

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