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China Finance Online Co. (JRJC)

Q4 2006 Earnings Call

February 27, 2007 8:00 pm ET

Executives

Jing Wu - Investor Relations Manager

Zhiwei Zhao - Chief Executive Officer, Director

Jun Wang - Chief Financial Officer

Analysts

Dick Wei - JP Morgan

Jeffrey Chau - Private Investor

Chang Qiu - Forun Technology Research

Gene Lee - Eastern Advisors

Presentation

Operator

Thank you for holding and welcome to the fourth quarter and full year 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. Please go ahead.

Jing Wu

Thank you, Operator. Welcome, everyone, to China Finance Online’s fourth quarter and full year 2006 financial results. Today with me on the conference are Mr. Zhiwei Zhao, our CEO; and Mr. Jun Wang, our CFO.

After market close today, the company issued a press release containing the financial results for the fourth quarter and full year of 2006. The purpose of this conference is to provide detailed information regarding these financial results. Following our formal remarks, we will 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 some forward-looking statements. This announcement contains forward-looking statements. These statements are made under the "safe harbor" provisions of the U.S. Private Securities 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 statement. Potential risks and uncertainties include, but are not limited to, our historical and possible future losses, limited operating history, uncertain regulatory landscape in the People's Republic of China, fluctuations in quarterly operating results, our ability to successfully compete against new and existing competitors, our reliance on relationships with Chinese stock exchanges and raw data providers, changes in accounting policies, our ability to successfully acquire and integrate businesses and the impact of our investments on our financial results.

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, 2005, and other filings with the Securities and Exchange Commission. China Finance Online does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

Now, I am going to pass the call to Mr. Zhao, our CEO.

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Zhiwei Zhao (Translation)

Good morning and good evening. Welcome to China Finance Online’s 2006 fourth quarter and full year earnings conference.

In this fourth quarter, we reported net revenues of $2.52 million, representing an increase of 33% year-on-year and an increase of 46% quarter over quarter. This is also the first time since Q4 2004 that we see net revenue to increase on both a sequential and year-over-year basis.

I would be glad to share with you that cash for subscription fees paid by individual customers for this quarter reached our historical high, representing an increase of 449% year over year and an increase of 145% quarter over quarter.

Other than the positive impact from the Chinese stock market, I believe that this is also the milestone that marks the improved marketing, product development, and execution abilities of our team.

In the fourth quarter of 2006, we released the new homepage for jrj.com. With this upgrade, its look and feel, functionality and the constant coverage have been enhanced significantly. Our average daily page views and unique visitors reached an historic high as well in this fourth quarter of 2006. The website’s leading market position is further solidified.

Looking back to the full year of 2006, we have made a significant achievement in product development by carefully researching the needs of the new generation of individual investors. We were happy to identify that the individual investors and the professionals in China began to adopt the new idea of using [financial] information and analytical results to support their investment decisions.

Based on this finding, we formally launched a new comprehensive financial information platform called Value Engine in late August of 2006. In late September, we rolled out a lower end version to capitalize on the investors’ increasing demand. Sales of the Value Engine have contributed about 50% of the total cash subscription fees paid by individual customers for the year 2006.

The most important task of China Finance Online in Q3 and Q4 of 2006 has been the acquisitions of Shenzhen Genius and Stockstar.com. Along with the completion of these acquisitions in September and October of last year, we immediately started in the integration process in such key functions as sales, management, product development and IT. In the fourth quarter of 2006, we have made a smooth and rapid progress in integrating the various business functions and each is completely strategic in the resource adjustments for the new year.

As scheduled, the entire integration process will be fully completed by the end of next month. We expect to leverage the company’s many resources of all these operations into a better position for us for development healthily and rapidly.

Looking forward to 2007, we will continue to reinforce our productive capabilities to improve product mix and develop more and more innovative service packages, and at the same time explore new business opportunities. With such efforts, we are convinced that we will significantly enhance our competitive capabilities and market power in both individual and institutional markets, and therefore create great value for our shareholders.

Finally, I would like to take this opportunity to express my great appreciation to our investors, research analysts, media friends and all partners. We are looking forward to your continuous support in 2007.

With that, I will now pass the call to Jun, our CFO, to give more details on the financial results.

Jun Wang

Thank you. Good morning, everyone, and welcome to China Finance Online’s fourth quarter and full year 2006 earnings conference call.

In the fourth quarter of 2006, it is the first quarter for the company to fully consolidate Stockstar and Genius as a result of the two acquisitions completed in October and late September 2006 respectively.

In this fourth quarter, we reported net revenues of $2.52 million, an increase of 33% from $1.90 million for the same period last year and an increase of 46% from $1.73 million for the third quarter of 2006. The increase year over year and quarter over quarter was primarily due to the increase in the revenue generated from subscription services provided to individual customers.

In the fourth quarter, the company achieved record sales of subscription packages, particularly the Value Engine series provided to individual customers. Revenues from subscription services provided to individual customers was recorded $1.86 million for the fourth quarter of 2006, up 60% year on year compared to $1.17 million in Q4 2005, and up 35% quarter on quarter compared to $1.38 million in Q3 of 2006.

In addition, deferred revenue at the end of the fourth quarter of 2006 reached the company’s historical high of $6.42 million, an increase of 245% compared to $1.86 million for the same period in the year 2005, and an increase of 126% compared to $2.84 million in the previous dollar. Deferred revenue represents prepaid service fees made by customers for subscription services that have not been rendered as of December 31, 2006. So for our subscription business, individual customers pay the entire subscription fee up front in cash for services to be received over a specified period of time, typically on 12 months.

Under U.S. GAAP, such subscription fees are recognized as net revenues reasonably over the service period, and those that have not been rendered at the end of the reporting period are recorded as deferred revenue in the balance sheet.

A significant increase in deferred revenue is due to our strong performance in the subscription business, and such an increase in deferred revenue will be recorded as net revenues over the next several quarters.

Revenues from subscription service fees paid by institutional customers for the four quarter were $179,000, representing 7% of net revenues for the quarter. For such services, we provide a financial database and analytics to institutional customers, such as securities and investment firms, mainly through Genius, the company we acquired in September 2006.

Revenues from the advertising-related business was recorded $194,000, about 8% of net revenues for this fourth quarter. The advertising-related business decreased by 75% compared to $789,000 for the same period of 2005 and decreased by 45% compared to $353,000 in the third quarter of 2006.

The company sees these crucial services as our current core business and primarily use our jrj.com and Stockstar.com websites to advertise for our own subscription packages and brands, as well as related promotional campaigns.

So in the fourth quarter, we continued to allocate most of our advertising spaces to both websites to promote our subscription services and brands, which caused the decrease of revenues from our advertising-related business. I am glad to say such a strategy paid off substantially, as illustrated by the strong growth in deferred revenues, and also revenues from subscription service fees in the fourth quarter.

Revenues from wireless related services currently provided by Stockstar for the fourth quarter were $298,000, representing 12% of net revenues for the quarter.

For the full year ended December 31, 2006, net revenues decreased by 5% to $7.13 million from $7.48 million for the full year 2005. The decrease is due to the decline in revenues from advertising-related business in 2006, as well as declining revenues from subscription services for the first three quarters of 2006.

Gross margin was 75% in the fourth quarter, compared to 92% in the same period of last year and compared to 81% for last quarter. The year-over-year decline in gross margin was primarily due to the increase in the cost of bandwidth, cost of raw data, and compensation expenses associated with increased headcount in the team. The quarter-over-quarter decline in gross margin was primarily due to the lower gross margin of wireless related services acquired from Stockstar.

Operating expenses for the fourth quarter totaled $2.63 million, an increase of 155% from $1.03 million year over year and increased by 127% from $1.60 million quarter over quarter. The increase year over year and quarter over quarter was primarily due to expansion in operating scale associated with the acquisitions of Stockstar.com and Shenzhen Genius, as well as the increase in compensation expenses as a result of increased sales force and product development headcounts in the fourth quarter.

The company reported a loss from operations of $741,000, decreased 202% from $722,000 of operating income from the same period in 2005, and decreased 400% compared to operating income of $247,000 for the last quarter. Excluding stock-based compensation expenses of $225,000 due to adoption of SFAS-123R, loss from operations for the fourth quarter would have been $516,000.

In the fourth quarter, the company recorded an investment impairment of $1.32 million against our investment in Moloon International Inc., reducing the carrying value of such investment on our balance sheet by 9.5% from $13.93 million to $12.61 million.

The impairment is due to the regulatory changes on mobile value-added services, reinforced by the Ministry of Information Industry of China and also China Mobile in the second-half of 2006. Such changes have substantial negative impact on all MVAS providers including Moloon. Currently Moloon has adopted new strategies to transform itself into a leading provider of mobile online gaming services and the value of our investment in Moloon may improve if such strategies prove to be effective.

According to its unaudited financial reports, Moloon has a cash balance of approximately $12 million as of December 31, 2006.

Net loss for this quarter was $1.7 million. Excluding investment impairments of $1.32 million in our equity investment in Moloon, net loss for this fourth quarter would have been $380,000 as compared to net income of $557,000 in the fourth quarter, and compared to net income of $1.06 million in the fourth quarter of 2005.

Stock-based compensation expense of $225,000 was recorded in this fourth quarter’s net income as a result of our adoption of SFAS-123R.

Net loss for the full year 2006 was $600,000 compared to a net income of $4.62 million for the full year 2005, down 113% year over year. Excluding the investment impairment of $1.32 million U.S. dollars in Moloon and stock-based compensation expense of $1.18 million due to the adoption of SFAS-123R, non-GAAP net income in the full year 2006 would have been $1.91 million, down 59% year over year. The decrease is mainly due to an increase in the cost of sales, G&A expenses, and sales and marketing expenses.

Now, let’s move to the balance sheet for this fourth quarter. Our cash balance was $44.96 million at the end of 2006, compared to $41.62 million by the end of the third quarter of 2006, an increase of $3.34 million.

That concludes my comments on the financial part and we are now ready to take any questions you may have.

Jing Wu

Operator, we are ready to take the questions.

Question-and-Answer Session

Operator

(Operator Instructions)

The first question is from Mr. Dick Wei from JP Morgan in Hong Kong. Please go ahead.

Dick Wei - JP Morgan

I have a few questions. The first question is what do you think are the key growth drivers going into 2007, particularly which area do you expect to see high growth or you will put more focus on?

The second question is if you can break out the deferred revenue, where does the deferred revenue come from? Is that mainly from subscription, or maybe there is some amount coming out from Stockstar or Genius?

Jun Wang

For 2007, we see the growth drivers of our revenue mainly comes from the subscription services provided to individual customers. That is where we will see the drivers of our business for 2007.

For deferred revenue, in my comments, we did not actually separate the deferred revenues between Stockstar versus jrj.com, but I can confirm that in the deferred revenues, most of the deferred revenues, I would say almost all deferred comes from subscription service fees paid by the individual customers. The reason is just because of our business model. For subscription services provided to individual customers, they pay the entire subscription up front for the entire specified period, say 12 months. For this reason, we have no account receivable risk.

For our other business, for example, advertising or wireless related and also for subscription services provided to institutional customers, we do not have the advantage of collecting cash in advance. So in this sense, deferred revenue mostly comes from subscription services provided to individual customers.

Regarding your question of the breakdowns of deferred revenue between Stockstar and also jrj.com, I am sure you are also concerned about whether and how we actually separate the revenues from subscription revenues for the individual customers between Stockstar and jrj.com. The reason we did not actually separate the revenues and also deferred revenues between Stockstar and jrj.com are actually because of a couple of reasons.

First, prior to the acquisition of Stockstar, the Stockstar subscription business was very weak. Based on our due diligence, its net revenues from subscription business is typically less than $100,000 per quarter. So put it this way; Stockstar’s software subscription business is almost negligible compared to jrj.com, which is well above $1 million per quarter.

When we started to integrate Stockstar’s subscription business, we literally rebuilt the entire practice by sending our best people to run their operations, recruiting and training their sales reps and customizing jrj.com’s products and developing new products for Stockstar, and also building a new call center for them. Also, the headcount increased of their sales force in the fourth quarter.

So literally we rebuilt the entire subscription business for Stockstar.

Another reason is we do not run Stockstar as a standalone division that operates as a first line, such as software subscription services parallel to those of our existing operations as jrj.com. Rather, we fully integrate Stockstar software subscription services with those at jrj.com. The reason is we want to make sure we can effectively utilize all the resources available. For example, customer information, sales rep, customer support, and also R&D efforts.

So there are a lot of cross-selling resource sharing activities going on between the software subscription businesses of Stockstar.com and also jrj.com.

Starting January 2007, actually the software subscription business of both jrj.com and Stockstar.com are managed by the same team at a corporate level to ensure the optimal utilization of all available resources.

For example, a Stockstar sales rep may have some particular skills in certain aspects, and this Stockstar sales rep may be assigned to sell a service package to an existing jrj.com subscriber. Even though from an accounting perspective we are able to separate subscription revenues from Stockstar.com from those from jrj.com, that does not give a full picture of how our subscription business performs, especially -- even could cause confusion if the management team of the software business at the corporate level decides to boost summer sales at Stockstar by allocating more of jrj.com’s resources to Stockstar, or vice versa.

So both from a business and management perspective, we consider the growth of Stockstar software subscription services as an expansion of our already existing business lines at jrj.com. It may be misleading if revenue for such services are reported separately for Stockstar and jrj.com.

I just want to give you a feel of how the subscription business of Stockstar is doing. I would like to mention that Stockstar also achieved record high cash revenues in the fourth quarter for their subscription-based services, and although most of these are recorded as deferred revenues because of the amortization of subscription fees over a service period as required by U.S. GAAP.

For example, this is actually consists of my answer to your questions. Did I answer your question about your concerns?

Dick Wei - JP Morgan

Yes, that was very helpful, actually. I have a follow-up on the operating expenses side. This quarter and last quarter, there is a lot of acquisition or merger-related expenses. Going forward into 2007, what kind of SG&A expenses or the G&A expenses that we expect, and the amortization expenses that we should expect to see in the next couple of quarters?

Jun Wang

We do not expect a significant increase in SG&A expenses and also our other expenses. The reason is our current business is quite scalable, which means even if our revenue actually increases by 100%, it does not mean that we have to increase our G&A expense or product development expense. Our R&D, for our product development expenses, as you see for this quarter, we record about $300,000 per quarter, excluding the stock-based compensation of about $30,000. That actually includes the technology talent we acquired from Genius and Stockstar.

As Zhiwei Zhao, our CEO, has mentioned we will have stepped up our efforts for R&D functions, but that does not mean we will put more efforts into recruiting more people. We would rather actually try to move around resources within the three locations, Shanghai, Shenzhen and Beijing, though we decide to concentrate R&D actually in Beijing.

So we have a lot of internal resources to mobilize. In this sense, we do not think that our expense will increase significantly or proportionately as compared to our revenue.

Dick Wei - JP Morgan

But if I add up the G&A expenses, for example, it is around -- the G&A expenses is around like $100,000, and then sales and marketing expenses is about $1.2 million, both grew substantially, increased from last quarter. Should I expect a similar level going forward for G&A and sales and marketing expenses?

Jun Wang

For the next few quarters it may, but actually we may also take efforts to reduce, to achieve cost savings achieved through the acquisitions. In the fourth quarter, most of our people have actually tried to realize synergies from generating more revenues. For cost savings, it takes some time. Actually, because we are also trying to integrate IT and other aspects.

For example, we may increase the headcount in a particular function but the increased headcount sometimes means we want actually to identify who are the poor performing employees as we may reduce headcount to ensure the effective use of the talent. So in this instance, we do not foresee a significant increase in our expenses.

Operator

The following question is from Jeffrey [Chau], a private investor. Please go ahead. Sorry, Mr. Chau just withdrew his question. The following question is from Mr. Chang Qui from Forun Technology Research. Please go ahead. Mr. Qiu, you may start to ask your question. Sorry, Mr. Qiu has withdrawn his question as well. Mr. Chau, please go ahead with your question.

Jeffrey Chau - Private Investor

I have two questions. First, [inaudible] is going fast, but as for the advertisement revenue, this quarter is only $1.9 million something. As I remember for second quarter in 2005, and you could have a $0.789 million. Is the company going to be more aggressive in this channel, or do you think it is possible for us to see a big number in future quarters?

Jun Wang

As I mentioned earlier in my speech for discussing the revenue from the advertising business, we see our core business actually is our subscription business provided mostly to individual customers and now also for institutional customers. We actually advertise using the advertising inventories of jrj.com and Stockstar.com, these two websites, to run promotions and advertising for our own service packages and also our brand. For this reason, we actually allocate most of these advertising inventories for our own advertising campaigns. This actually causes a decrease of our advertising revenue.

As I discussed, we have seen substantial growth in our deferred revenues and also over 30% growth compared to last quarter of our subscription services. This actually proves our strategy of actually allocating most of our advertising inventory to our own business is very effective.

For this reason, we do not foresee in the next few quarters that our advertising revenues will increase significantly.

Jeffrey Chau - Private Investor

Yes, I think it won’t because I watch the Alexa traffic statistics, and jrj.com even [inaudible] and I think it will not take much effort for you guys to get more advertisement. Frankly speaking, I am kind of disappointed at this quarter’s advertisement value. I hope you guys could be more aggressive in this.

The second question is related with your expense. Could you explain a little bit about the main reason for your expense growing much faster in this quarter, and is that related with moving? I know both jrj.com and Stockstar.com moved to new locations. Is that related with this event or something else? Did I miss anything? I don’t know. I just think your expense is increasing a little bit faster than I expected.

Jun Wang

First of all, on the expense question, while the increase of the expense is mostly related to the acquisitions, because after the acquisitions we expanded our operating skills significantly. Just imagine, Stockstar, just business traffic as it is a similar size to the jrj.com, so you can imagine all the related expenses associated with the acquisition.

For Genius, while it does not operate a website, a high-traffic website, it also has the headcount, the lease, those kinds of expenses. So the increase of expenses is mostly related to the acquisitions of Stockstar and Genius. But also, when we increased our headcounts for our sales force and also R&D team, and the compensation expense also increased.

Let me actually get back to your question about advertising. If we actually pursue advertising as our core business, we definitely can increase our advertising revenue, but for us it is a trade-off. If we sell most of our advertising inventories to the other advertisers, we can get advertising dollars but we lose the chance of selling our subscription services. We determined that selling our own subscription services is much more profitable and valuable than selling the advertising inventories to other businesses.

Second is in our subscription business, this information service industry, we are the clear leader in this sector and we see by solidifying our position in this sector helps us to get a much better strategic position in the market, and that can also lay the foundation for our growth in other service areas.

Jeffrey Chau - Private Investor

I understand that but I do not agree that you are [inaudible] positions to your own product. I think you might do more advertisements, maybe in finance channel in SINA and attract more new users into your website, but I did not see that. Anyway, I think you had a good quarter and I think it is a good execution, but -- I have no more questions, but I wanted to say to your management, as for your product development, as I mentioned before, I would kind of like your [inaudible] to be integrated with trading as a benefit and increase, all the other brokerages cannot and so the user can have integrated trading platform. I think that will be [inaudible], and will be running a new product in the Chinese market, so your brokers do not have to develop their own product and then you have an open interface for entering into accounts and the user can have an integrated platform to trade.

I think by adding this functionality it is best [inaudible] interface, and I think your company will sell more product, you know? I cannot think back there, but what do you think about this idea? I kind of want -- it is -- I want you guys to be open to the suggestion and I want to listen to your guys opinion about it. What do you think?

Jun Wang

Well, we do not rule out the possibilities of working with brokerage firms and other financial institutions, but at this time now that takes effort to find out what is the best deal to work with and what is the best corner. In the future, we may enter into this kind of arrangement with some financial institutions.

Jeffrey Chau - Private Investor

I think it won’t be a big problem if you have the channel and connections in China. Maybe you can just [inaudible] because you have the exclusive authorization for [inaudible], on the Shanghai stock market?

Jun Wang

We are the first of three operators allowed to post it but now they have more, so it is a very competitive market.

Jeffrey Chau - Private Investor

Okay, okay, yes, but I also think that is just a suggestion. Anyway, I think I am done with my questions and suggestions. Thank you for your answer.

Operator

The following question is from Chang Qiu from Forun Technology Research in the United States. Please go ahead.

Chang Qiu - Forun Technology Research

In the past, you disclosed the number of new subscribers, number of repeat subscribers, and also the average subscription price for the new users and repeat users. Can you do that for this past quarter too?

Jun Wang

Last quarter after the acquisition, we may actually provide a new set of operating data to better illustrate our business performance. The reason we did not provide ASF and our new or repeat subscribers is actually -- for example, just take ASF as an example. ASF sometimes is misleading information on our business. Many investors tend to see a rising ASF as good and down as bad. But actually, it is just another case.

In the high-end market segment, high ASF means you can increase your paying power of a customer, but in a low-end market, for example, even if we reduce our ASF, for example, we develop a very popular mass-market product, the ASF may be low but actually this low ASF may be more profitable, and also because of the large market size, it may actually prove to be more beneficial not only to the company but also to the investors.

Also, for the new and repeat subscriber issue, with the acquisition of Stockstar, we have fully integrated the resources of both websites, of jrj.com and also Stockstar.com. And such resources including customer lists and also some other information. For example, a prior customer of Stockstar may actually buy a jrj.com through a jrj.com sales rep, but this sales rep may be based in Shanghai where Stockstar is located. But this sales rep actually may be employed by Stockstar even though this sales rep represents jrj.com, so from a business and operational perspective, it is very difficult to differentiate whether this is a new or repeat subscriber from which website or which function.

We believe the new/repeat subscribers for a particular website is not that reliable an operating statistic for our subscription services provided to individual customers. Now, we provide user accounts and also fee-based active subscribers. The ratios between them will link the users of our website to the monetization of our traffic, so therefore these are better statistics. Regular users are a proxy of our potential customers, while the number of fee-based active subscribers, and also it changes [inaudible] in our current monetization capability. Currently, it is still small but it definitely has a very huge growth potential.

For example, take the conversion rate as an example. Our ratio of fee-based subscriber to [res] user accounts is only about 0.5%, so what if it is 1%, what if it is 5%? By improving our operating statistics, we can definitely improve our financial business performance.

As I mentioned, [res] users is a proxy to our website traffic but this actually illustrates the frequent, stable visitors.

I also want to say the [res] user accounts and also fee-based subscribers will not be the only operating statistics that we will release in the future. For example, some investors tend to use the new and repeat subscribers and ASF we previously release to our investors, use this information to estimate our cash flows. The company has not released the quarterly cash flow data, but starting from next quarter, we may release cash flow data such as operating cash flows from subscription-based services. This can facilitate our investors about our financial performance.

For this quarter, since we did not have material filings or investing activities, the increase in our cash balance in the fourth quarter, which is a $3.34 million, this is a proxy of our free cash flow. This can demonstrate our financial business performance.

For our software subscription services provided to individual customers, which is currently our core business, cash flow information is very helpful and oftentimes I believe this is more meaningful for investors to analyze our performance.

Chang Qiu - Forun Technology Research

Okay, that is fair. Also, I was thinking, regarding the organic growth rate, if we initially just roughly take out the 139K from institutions, that is mostly by Genius, and then 298 from Stockstar, that is the wireless. Basically the rest are mostly from jrj.com, right?

Jun Wang

Yes, most are from jrj.com. I mentioned, for our subscription services provided to individual customers, this is our core software subscription business, we recorded $1.86 million for Q4. This is up 60% compared to last year and 75% compared to Q3, but I want to emphasize, as I mentioned in the speech that most of these subscriptions, cash subscriptions we receive are recorded as deferred revenue. So our deferred revenue actually increased substantially, 126% compared to last quarter, and if you compare to last year over the same period, close to 250%.

Chang Qiu - Forun Technology Research

Maybe a related question, in the two months of the new year in 2007, how is your subscription business going?

Jun Wang

This is information that we are not going to discuss during conference calls. We do not provide guidance for our financial performance.

Chang Qiu - Forun Technology Research

Is it about the same rate as the last quarter, or you see a slowdown or acceleration?

Jun Wang

I will leave this question to the Q1 2007 conference call.

Operator

(Operator Instructions)

The next question is from Gene Lee from Eastern Advisors in the United States.

Gene Lee - Eastern Advisors

I have two questions. One is obviously the margin picture after the acquisitions has changed. After this consolidation period, what is your normalized operating margin going forward? It used to be high 30s to 40s. Now obviously you are at a loss, but after consolidation, what is the normalized level you are aiming at? That is one.

Second, how long would this consolidation period take? Meaning, how long before we see break-even? Then I have a follow-up question.

Jun Wang

The decline in operating margins is because of the increase of our operating expenses. As I mentioned, our operating expenses may not increase by a large percentage. The improvement of our operating margin probably depends on how fast we can increase our revenue.

In this instance, we believe our operating margin will improve in the next quarter or two, even though it is difficult to predict when we can achieve break-even.

Gene Lee - Eastern Advisors

My follow-up question was sort of mentioned already, but I just want to point out; I am actually looking at your website right now. I understand that online trading in China is probably still way off and it is difficult to really build the business model based on a transaction-based model, but on the other hand, I think you can really sell some banners or buttons for large securities houses in China just by charging them -- it’s almost advertising but you are sort of channeling revenue for these guys and that could be priced at a far higher rate than just normal advertising because you have obviously tagged your customer for securities.

Jun Wang

Actually, this is similar to why we actually try to allocate most of our advertising inventories for our own business. The most valuable asset of our business -- personally, I do not think this is actually is our current business -- is the millions of users of our website. That is actually wealthy Chinese investors. By running advertising for some firms that are also financial institutions, while we do not lose -- what we get is advertising but we would lose is probably the most valuable thing, our customer list, our customers.

At this stage, we believe our core business actually is running our own subscription service and though we do not rule out the possibility if the opportunity comes that actually we can have a close relationship with certain financial institutions.

Mr. Zhao, do you want to add anything for this topic?

Zhiwei Zhao (Translation)

Thank you. It is a good question. I just heard that many people are raising the question about our new business opportunities. I think that Jeff already gave them color on this. As we just indicated in our earnings, we have currently millions of registered users, which is quite valuable to us. China Finance Online is now providing their financial information and subscription-based services to our customers.

As I already indicated in my speech earlier today, besides our efforts on the R&D for this new year 2007, we will continue to look for new opportunities for our business development. I think that under the regulation of PRC, we will try to find the most [inaudible] business opportunities and figure out how we could do it.

I think even among our business base, I still see great potential. As you have seen in our earnings, we have currently about 6.05 million registered users and around 28K fee-based active subscribers.

I think the most priority on tap for us is to provide better service to our existing customers. Thank you.

Operator

(Operator Instructions)

There are no questions on the queue at this stage.

Jing Wu

All right. That is all for today’s conference. If you still have further questions, you may reach our IR group at 8610-5832-5288, and our e-mail address is ir@jrj.com. Ladies and gentlemen, thank you again for joining us today. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the meeting. You may now disconnect your lines.

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Source: China Finance Online Q4 2006 Earnings Call Transcript
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