China Finance Online Co. Limited (NASDAQ:JRJC)
Q3 2016 Results Earnings Conference Call
November 29, 2016, 08:00 PM ET
Zhiwei Zhao - Chairman & CEO
Jeff Wang - Director & CFO
Ladies and gentlemen, thank you for standing by, and welcome to the China Finance Online 2016 Third Quarter Earnings Conference 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, Wednesday the 30 of November, 2016.
I would now like to hand the conference over to your host today, Mr. Dixon Chen [ph] Thank you. Please go ahead.
Unidentified Company Representative
Thank you. Welcome to China Finance Online third quarter 2016 financial results earnings conference call. With us today are Mr. Zhiwei Zhao, Chairman and CEO, Mr. Jeff Wang, Director and CFO. Mr. Zhao will provide a summary of the business dynamics in the quarter, then Mr. Wang will review the quarterly financial results. There after the management will hold a question-and-answer session. We will provide translations during the Q&A session.
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 Private Securities Litigation Reform Act of 1995. The words believe, estimates, plans, expects, anticipates, projects, targets, optimistic, intent, 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 conditions.
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 the forward-looking statements in the future.
At this time, I would like to turn the call over to Mr. Zhao.
[Foreign Language] Good day everyone, and thank you for joining today’s call. [Foreign Language] In the third quarter of 2016, we continue with our transition towards becoming a one-stop investment gateway for Chinese retail investors by providing a state-of-the-art platform where our best-in-class technologies meet Chinese retail investors' growing needs in trading, advisory services and investments."
Yinglibao continues to gain traction among our users, as the purchase of various wealth management products totaled RMB2.5 billion in the third quarter, demonstrating a significant growth from RMB1.2 billion in the second quarter and RMB352 million in the first quarter, respectively.
While we are not in a rush to monetize all services offered on our platform, we are certainly encouraged by the increased user engagements on iTougu, which now features thousands of financial advisors, actively mentoring millions of investors throughout China on a monthly basis. We look forward to leveraging our large user base to generate sustainable growth in the future.
In early November, we conducted a trial launch of a proprietary robo-advisory service. The robo-advisory service enables China's vast retail investors with different financial standings and risk profiles, to not only gain access to high-quality financial products and more personalized services, but also to reduce risk exposure through more diversified asset allocations.
Built upon the foundation developed by Yinglibao and iTougu, the introduction of our proprietary robo-advisory service once again showcased our superior technology capabilities and deep resources in China's capital markets.
In order to operate a fully functioning robo-advisory service to distribute the full range of financial products in China, two critical licenses issued by the Chinese government are required, a Mutual Fund Distribution License and a Securities Investment Advisory License.
We are one of the handfuls of companies in China holding both licenses. With heightened user experiences, broadened product offerings and strong compliance to government regulations, we are very well positioned to grow our market shares in a large addressable market.
In conclusion, our operating, engineering and sales teams are working tirelessly in executing our growth strategy and we look forward to further enhancing the services. We have to create value for our customer and shareholders.
Additionally, even though we're leading positions we will host the 2016 Fintech Forum & Leading China Annual Awards in Beijing on December 8th. The key-note speakers for this event include senior management from financial companies and banks, and also officials from regulatory commissions. The Forum expects over 500 attendees from a large number of prestigious Chinese financial institutions, including banks, broker dealers, asset management firms and insurance companies.
With that, I'll now turn the call to the CFO, Jeff Wang, to go over the financial details for the quarter. Thank you.
Our major items for the second quarter, please note that all financial numbers are unaudited and presented in U.S. dollars and rounded to one decimal point for approximation.
Net revenues were US$17.1 million, a decrease of 53.8% from US$37 million during the third quarter of 2015, and an increase of 6.3% from US$16 million during the second quarter of 2016.
During the third quarter of 2016, revenues from financial services, the financial information and advisory business, and advertising services contributed 82%, 13% and 4% of the net revenues, respectively, compared with 83%, 12% and 5%, respectively for the corresponding period in 2015.
Revenues from financial services were US$14 million, a decrease of 54.3% from US$30.7 [ph] million during the third quarter of 2015, but an increase of 15.3% from US$12.2 million during the second quarter of 2016.
Revenues from financial services comprise of equity and commodities brokerage services. Equity brokerage business grew 331.7% year-over-year and 228.5% quarter-over-quarter. The year-over-year decrease of revenues from financial services was mainly due to a decline in revenues from the company's commodities brokerage services.
Revenues from commodities brokerage declined by 62.8% year-over-year and 1.1% quarter-over-quarter. Due to a variety of global geo-political uncertainties, the crude oil market experienced unusually unfavorable volatility during the third quarter, which adversely affected investors' confidence.
Revenues from the financial information and advisory business were US$2.2 million, a decrease of 51% from US$4.4 million during the third quarter of 2015 and 25.3% from US$2.9 million in the second quarter of 2016.
Revenues from the financial information and advisory business were comprised of subscription services from individual and institutional customers. The decline in revenues from the financial information and advisory business was mainly due to the sale of a less profitable division in the financial information segment.
Revenues from advertising were US$0.7 million, a decrease of 59.1% from US$1.7 million in the third quarter of 2015 and 16.5% from US$0.9 million in the second quarter of 2016. The decline in advertising revenues was mainly due to the increased campaign of the Company's own service offerings during the third quarter.
Gross profit was US$12.6 million, a decrease of 60.1% from US$31.6 million in the third quarter of 2015 and an increase of 3.9% from US$12.1 million in the second quarter of 2016.
Gross margin in the third quarter of 2016 was 73.9%, compared of 85.6% in the third quarter of 2015 and 75.7% in the second quarter of 2016. The year-over-year and quarter-over-quarter decreases in gross margin were mainly due to a decrease in revenues from the company's commodities brokerage services, which typically carry higher gross margins.
General and administrative expenses were US$4.8 million, an increase of 48.1% from US$3.2 million in the third quarter of 2015, but a decrease of 15.6% from US$5.6 million in the second quarter of 2016.
The year-over-year increase was mainly attributable to an increase in share-based compensation expenses. However, we implemented more stringent expense control measures since the second quarter which led to a sequential decrease in G&A expenses.
Sales and marketing expenses were us$12.9 million, a decrease of 1.5% from us$13.1 million in the third quarter of 2015, but an increase of 18% from US$11 million in the second quarter of 2016. The quarter-over-quarter increase was primarily due to an increase in marketing expenses.
Research and development expenses were US$3.7 million, an increase of 45.7% from US$2.5 million in the third quarter of 2015 and 16.8% from US$3.1 million in the second quarter of 2016.
The year-over-year and quarter-over-quarter increases were mainly attributable to an increase in recruitment of senior software engineers and capital market professionals to support further development in all lines of business.
Total operating expenses were US$21.3 million, an increase of 13.2% from US$18.9 million in the third quarter of 2015, but a decrease of 22.3% from US$27.5 million in the second quarter of 2016.
Loss from operations was US$8.1 million, compared with an income from operations of US$12.9 million in the third quarter of 2015 and a loss from operations of US$15.3 million in the second quarter of 2016.
Net loss attributable to China Finance Online was US$3.6 million, compared with a net income of US$9.7 million in the third quarter of 2015, and a net income of US$12.8 million in the second quarter of 2016.
Fully diluted loss per ADS attributable to China Finance Online was $0.16 for the third quarter of 2016, compared with fully diluted earnings per ADS of $0.39 for the third quarter of 2015 and fully diluted earnings per ADS of $0.50 for the second quarter of 2016.
Basic and diluted weighted average numbers of ADSs for the third quarter of 2016 were 22.7 million, compared with basic and diluted weighted average number of ADSs of 22.2 million and 24.8 million for the third quarter of 2015, respectively. Each ADS represents five ordinary shares of the company.
As of September 30, 2016, total cash and cash equivalents, restricted cash and short-term investments were US$68.9 million. Total shareholders' equity of China Finance Online was US$99.7 million as of September 30, 2016.
I will now quickly go over the results for the first nine months of 2016. Net revenues for the first nine months of 2016 were US$63.8 million, a decrease of 13.5% compared with US$73.8 million in the first nine months of 2015.
Gross profit for the first nine months of 2016 was US$50.7 million, a decrease of 15.8% compared with US$60.2 million in the first nine months of 2015.
Net income attributable to China Finance Online for the first nine months of 2016 was US$11.2 million, a decrease of 10.6% compared to US$12.5 million in the first nine months of 2015.
Fully diluted earnings per ADS attributable to China Finance Online was $0.44 for the first nine months of 2016, compared with $0.50 for the first nine months of 2015.
Before we open the floor for questions, I will like to share a few thoughts with our investors. While we continue to invest in the next generation of products and services, we are taking measures to improve efficiency and increase productivity by divesting underperforming divisions and focusing on areas with potential for monetization.
Our balance sheet remains strong with cash and cash equivalents, restricted cash and short-term investments accounting for approximately 70% of our market cap and our book value is approaching US$100 million. Given our growing user activities and longstanding brand name in China, we believe that we are well positioned to create long-term value.
This wraps up my remarks. And operator, we are ready to take questions. Thank you.
Thank you very much. [Operator Instructions] Your first question comes from the line of Josh Black from Shuaa Capital [ph] Please go ahead.
Yes. Great conference so far. I had a question, it seems the equity brokerage business is showing some significant growth, can you elaborate on the drivers behind this growth?
Hi, thank you. This Jeff Wang, Director and the Chief Financial Officer of China Finance Online. Yes, that business line indeed grew a lot in the third quarter, 331.7% year-over-year and 228.5% quarter-over-quarter respectively. We believe that our equity services meet the Chinese investors growing need for diversified asset allocation and we believe this trend is still in its infancy and we continue to closely follow the regulatory changes, as we proactively explore this growth opportunity. We do have strong confidence in the markets long-term prospects. Thank you.
Your next question comes from the line of Bob Wilson. Please go ahead.
Hi. Thank you for taking my question. I am mostly interested in the robo advisory service, you say it has started its trial run, but how do you differentiate your service from your competitors?
That’s a very good question. And our robo advisory services focuses on KB [ph] investors with all different financial standings and risk profiles access to a broad range of investment allocations. With our technology our users can enjoy personalized customer services, creating an improved user experience.
And in addition, we incorporate heightened risk management for our user’s investment by selecting high-quality firms and diversifying assets, as we believe the steady appreciation of our users investments will lead to the stable growth of our business.
Our robo advisors strengthens our existing Yinglibao and iTouGu services and their are large and fast growing user base to further enhance our competitiveness in the market place.
As we mentioned earlier on the call, we are one of handful companies holding both government issued Mutual Fund Distribution License and Securities Investment Advisory License and this is a competitive advantage and it makes us not only more compliant with government regulations, but ultimate professional in recommending broader range of investment products to our clients and to our competitors. Thank you.
Thank you. That was very helpful.
[Operator Instructions] Your next question comes from the line of Stephen Juilliard from Juilliard and Sons Investments [ph] Please go ahead.
Thank you for taking my question. Excellent conference, you certainly have struggled a bit the last two quarters in terms of revenue on bottom line profit, but it sound like you got some really good things in the pipeline and some encouraging things to tell your investors and we appreciate that.
Given what you've got going on and your product development, can you give us a little bit of color or maybe some insight on what we can expect to see in terms of revenue going forward for the next 12 months?
Okay. [Foreign Language] Well, this Jeff Wang, Director and Chief Financial Officer for China Finance Online. Yes, as you have seen that we do show a strong growth in our user base and also the user activities and we have a strong confidence that in the coming 12 months and our revenue will become – actually significantly improve as long as actually the market remains fair to our business and in business the management has very strong confidence in the performance in the coming year. Thank you.
Thank you for that response. You certainly do have a very – just a quick follow up, you certainly do have a very strong position in the market that’s to commended, can you give us some more insight as to what you see as the key drivers in terms of favorability of market conditions within the environment in which you operate?
[Foreign Language] We are mainly operating in China serving the retail investors in China and definitely not the overall - overall economic conditions will have a strong influence the overall actually operating of our business. And based on the improved economic conditions in China we believe based on the current conditions, we believe the coming year will be - actually significantly improved for both our business and our - in terms of actually monetization as well as actually our user performance.
Okay. All right. Thank you very much.
Ladies and gentlemen, if there are no further questions at this time, I would now like to hand the conference back to the management team. Please continue:
Thank you for attending China Finance Online's third quarter 2016 earnings conference call. We look forward to speaking with you. Thank you.
Ladies and gentlemen, that does conclude our conference call for today. Thank you for participating. You may now all disconnect.
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