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China Finance Online Co. (NASDAQ:JRJC)

Q2 2007 Earnings Call

August 14, 2007 9:00 pm ET

Executives

Melissa Zhang - Investor Relations

Zhiwei Zhao - Chief Executive Officer, Director

Jeff Wang - Chief Financial Officer

Analysts

Dick Wei - J.P. Morgan

C. Ming Zhao - Susquehanna Financial Group

Alex Xu - Brean Murray Carret

Jeffrey Chow

Ji-hoon Wei - Barker Investments

Presentation

Melissa Zhang

Hello, everyone. I’m sorry about the delay. It’s because of some technical mistakes and welcome to China Finance Online’s second quarter 2007 conference call. Joining me today in the conference, our CEO, Mr. Zhiwei Zhao; our CFO, Mr. Jeff Wang. After market close today we released a press release containing the financial results for the second quarter of 2007. 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 start, it is my duty to remind you that during today’s conference call, we will make some forward-looking statements, including statements about our future developments, our market position in individual and institutional markets, and our third quarter revenue guidance. These statements are made under the Safe Harbor provision 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 play undue reliance on them.

Forward-looking statements include inherent risks and uncertainties. We caution you that a number of the 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, fluctuations in quarterly results, our ability to successfully compete against new and existing competitors, 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, 2006, 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 will turn the call to our CEO, Mr. Zhao.

Zhiwei Zhao (Translation)

Hello, everyone. Welcome to China Finance Online’s 2007 second quarter earnings release conference call.

In the second quarter of 2007, we obtained great operating results, although the Chinese stock market plummeted on May 30, followed by sharp fluctuations in falling [inaudible]. Such great results obtained are primarily due to our management and employees’ considerable effort in daily active operating and enhanced meticulous management.

In this quarter, our operating revenue continuously made a steady and rapid increase. Net revenue under U.S. GAAP reached $5.72 million, exceeding the top end of our guidance, an increase of 43% quarter on quarter and 290% year over year. Net income under U.S. GAAP was $1.56 million, increased by 102% compared to first quarter of 2007 and 253% compared to the corresponding period in 2006.

Meanwhile, operating cash inflow made a rapid and sizable increase as well in this quarter, among which cash from subscription services provided to individual customers reported a record high $8.18 million. Despite the impacts from the Chinese stock market in this quarter, the sizable increase in our operating results once again demonstrates the excellent execution capability of our team and largely written dependency of our performance on China’s stock market.

From the operations perspective, we still attained strong growth in the second quarter. As of June 30, 2007, registered user accounts of jrj.com and Stockstar.com increased by 11% to 7.3 million from the previous quarter, and fee-based individual subscribers grew to 37,400, an increase of 18% from the previous quarter.

Based on our current advantages and achievements, in this quarter we also conducted effective measures to intensify our product R&D and obtain reasonable improvement in falling [inaudible].

First of all, we reinforced the financial web space of Genius. In this quarter, we worked hard to improve the structure and data quality of the Genius database, which enables timely, accurate, comprehensive and effective data supplies of products on the website. We believe such improvement in stability and the accuracy of products on the website helps us to establish unique competitive advantages in the market and furthermore solidify and enhance our market leadership position.

Second, improvement of existing product pipeline and develop potential product [theory]. In the second quarter, we also made efforts to reinforce an improvement on existing products while enriching product functions, enhancing technique and function stability and diversifying product pipes. More importantly, we are intending to develop a potential value-added product based on our fee-based user attracting platforms, including websites and mobile phones, and to bolster and explore potential effective target users more systematically.

Looking forward to the third quarter of 2007, we will more actively respond to market movements, focus on attracting, retaining, identifying, mining and upselling to the types of customer base who are consistent with our business model and directions, adapt marketing activity [already in principal], intensify telemarketing force and product R&D, consolidate the advantage of our websites as potential fee-based user attracting platforms, reinforce our brand penetration efforts, and at the same time, explore new business opportunities.

With such effort, we are convinced that we will significantly enhance our competitive capabilities and market power 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, and all our partners. We look forward to your continued support.

Now, I would like to turn the call over to Jeff, our CFO, to give more details on the financial part.

Jeff Wang

Thank you. Hello, everyone. Welcome to our second quarter 2007 earnings conference call.

Operating cash inflow during the second quarter of 2007 was $10.67 million, among which cash inflow from subscription services provided to individual customers, which is our core business, reached another record high of $8.18 million, up 14% compared to $7.2 million in the past quarter. Net operating cash flows for the second quarter of 2007 were $6.19 million, or $0.30 per fully diluted ADS, compared to $0.22 in the past quarter.

Despite the sizable adjustment of the China stock market in the latter part of the second quarter of 2007, we still obtained record high cash revenues from our individual subscription business. This shall be attributed to our improved execution capabilities, effective marketing strategy, and our continuous effort in website visitor retention and product development.

Driven by the strong performance of cash revenues from individual subscription business in three consecutive quarters since Q4 2006, net revenues in Q2 2007 were reported at the record high level of $5.72 million, exceeding the top end of our guidance of $5.5 million.

Net revenues for the quarter represents an increase of 290% from $1.47 million for the second quarter of 2006 and an increase of 43% from $4 million in the previous quarter.

In the second quarter of 2007, net revenues of all four of our service lines presented double-digit quarter-over-quarter growth rates. Subscription services provided to individual customers, our core business, represents approximately 81% of net revenues in Q2 2007. Net revenues from this service line totaled $4.66 million, an increase of 385% from $0.96 million in the second quarter of 2006 and an increase of 46% from $3.2 million in the previous quarter.

Net revenues from wireless related services currently provided by Stockstar, which we acquired last year, were reported $334,000, an increase of 12% from $299,000 for the previous quarter. Net revenues from wireless related services represent 6% of net revenue for this quarter.

Net revenues from subscription service fees paid by institutional customers were $258,000, up 34% from $192,000 in the past quarter. Net revenues from this service line represent 5% of total revenues for this quarter. For such service, we provide a financial database and analytics to institutional customers, mainly through Genius, which we acquired last year.

In this quarter, advertising based business brought in $396,000, up 60% from $247,000 in the past quarter, partly due to increased advertising activities by mutual fund firms on our website in the latter part of the second quarter of 2007. However, since our website, www.jrj.com and Stockstar.com are both considered platforms where we attract potential fee-based users for all different service lines, we will continue to allocate most online advertising inventories to promote our own subscription packages and plans, as well as establishing partnerships to increase traffic volume to these websites.

For that reason, online advertising will not be considered a sizable service line of our business in this quarter, nor do we expect it to be so in the following quarters of 2007, and therefore in 2007, we do not expect to grow our advertising business.

Gross margin was 81% in the second quarter, compared to 79% for both the same period in 2006 and the first quarter of 2007. Please note that the cost of revenues for the second quarter of 2007 included website maintenance and development expenses of $730,000, up 39% from $525,000 in the past quarter due to increased traffic to our website and increased headcount of the technology and editorial team.

Website maintenance and development expenses include bandwidth costs, personnel-related expenses, server depreciation expenses, and content expenses for our jrj.com and stockstar.com websites.

Since advertising-related business, which represents 7% of net revenues of the

second quarter of 2007, are no longer a sizable business of the company and the websites are both used as a platform to attract and retain potential users for our subscription services, website maintenance and development expenses do not have a direct relationship with net revenues recognized in the second quarter of 2007. So excluding website maintenance and development expenses of $730,000, the gross margin for the second quarter of 2007 would have been 94%.

In order to help investors to better understand our business, we will provide more non-GAAP financial measures which exclude share-based awards granted to employees.

Non-GAAP operating expenses totaled $3 million, up 24% compared to $2.41 million from the previous quarter. The quarter on quarter increase is primarily due to the increased compensation for the sales team as a result of increased headcount and improved performance, and also includes professional service fees associated with SOX-44 compliance.

Due to our intensified efforts in product development, the non-GAAP product development expenses for this quarter totaled $418,000, up 30% quarter over quarter.

In this quarter, non-GAAP operating profit was $1.65 million, an increase of 525% from $264,000 in the second quarter of 2006, and an increase of 115% from $767,000 in the previous quarter.

We also reported $2.16 million non-GAAP net income for this quarter, increased by 224% from $667,000 from the second quarter of 2006, and 85% from the $1.70 million from the previous quarter.

Adjusted EBITDA was $1.87 million for the second quarter of 2007, compared to $300,000 in the second quarter of 2006 and $944,000 in the previous quarter, up 523% year on year and 98% quarter over quarter.

Now let’s move down to the balance sheet. Our cash and cash equivalents were $56.15 million at the end of this quarter, an increase of $6.65 million, compared to $49.5 million by the end of March 2007.

Deferred revenues at the end of this quarter were recorded as $14.38 million, up 32% from $10.89 million in the previous quarter.

Regarding outlook for the third quarter, we currently expect to generate net revenues in an amount ranging from $6.7 million to $7.1 million, representing a 287% to 310% year-on-year growth.

Please note that this forecast reflects our current and preliminary view, which is subject to change.

We are now ready to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Dick Wei with J.P. Morgan Hong Kong. Please go ahead.

Dick Wei - J.P. Morgan

Good morning. Congrats on the good quarter. There’s a couple of questions. The first question is on the cash inflow that you saw this quarter of around $8.2 million. Approximately how much is it -- was it from the value engine or was it from the level two code, et cetera? If you can break it out, that would be great.

Jeff Wang

Sure. For this quarter, so basically about 57% comes from -- of the $8.2 million cash revenues from the subscription business comes from the Value Engine series; about 22% from the Grand Reference, which is the technical analysis series; and also about 14% from the Level Two Quotes and its related higher end version. So the rest of the 7% comes from the other software.

Dick Wei - J.P. Morgan

So you said the Value Engine was 17%, right?

Jeff Wang

No, 57%.

Dick Wei - J.P. Morgan

Okay, great. And the second question I have is for this $8.18 million, what was the average subscription fee and how many subscribers were included in that number? Because I think last quarter you mentioned about 7,000 for first quarter.

Jeff Wang

Yes, well for this quarter the average subscription fee for the $8.18 million cash revenue from the individual subscribers, the ASF, average subscription fee, is $700, which is actually compared to $1,000 in the last quarter. Also, the new subscribers that actually contributed to this $8.18 million was 11,500.

Dick Wei - J.P. Morgan

Okay, great. I guess my last question is basically on the forecast, the guidance that you have. If you can break out the revenue mix for the third quarter guidance -- is it going to be a similar ratio that we saw in the second quarter? Also, what is the driver that you think is going to be for the next quarter? Is it more on -- for the individual subscription, is it more on the ASF or is it going to be more on the number of new subscribers?

Jeff Wang

First, actually, for the third quarter of 2007, what we believe is actually the increase of our net revenues, while most of it comes from the subscription services provided to individual customers, so basically what we believe is about $5.9 million to $6.2 million will be contributed by the individual subscription business. So basically, it will account for a larger percentage of our current composition of our net revenues in the second quarter of 2007.

In terms of drivers for the growth of the subscription services provided to individual customers, that comes from the increase from the paid subscribers. We’ll expect the ASF to stay at between $600 or $800 per ASF. So this we believe ASF will be stabilized around $700, so expect to increase the number of subscribers.

Dick Wei - J.P. Morgan

So it seems the Asian market went down in May didn’t really impact the company a lot?

Jeff Wang

It’s a yes/no. Well, yes, actually, as a matter of fact the -- even though the Chinese stock market was extremely volatile actually in June of this year, especially there’s a sizable decline in the market, the stock index in the first week of June, preceding the dramatic decline in the index May 30th. Actually, we did achieve cash revenues in June far better than we had expected.

We believe that should be attributed to our increased, more effective marketing strategy and also our product stability has improve and we have tried to allocate more resources to gather and also to cultivate the potential customers who will become fee-based customers.

So on the other hand, we still want to caution that the volatility of the stock market does have some adverse impact on our business and we will be on full alert and will try to mitigate the risk from this perspective.

Dick Wei - J.P. Morgan

Great, thanks a lot. I’ll get back on the queue.

Operator

Thank you. The next question is from Ming Zhao from SIG U.S. Please proceed.

C. Ming Zhao - Susquehanna Financial Group

Thank you. Good morning. I just have one quick question; of the $8.18 million cash inflow for subscription business, how much of that is contributed by first-time subscribers?

Jeff Wang

We don’t have the breakdown at this moment but basically most of the 11,000 customers should be actually new customers, but I don’t have the breakdown available. Actually, we’ll try to provide this kind of information starting on the next quarter.

C. Ming Zhao - Susquehanna Financial Group

So let me understand that -- if you think that the most -- you said that 11,000 customers, right? And how much on average they pay for their subscription?

Jeff Wang

They pay $700.

C. Ming Zhao - Susquehanna Financial Group

Okay, so my question is really for the subscription that expired in the second quarter, do you mean that old subscribers have not renewed their subscription and the cash inflow is mostly contributed by new first-time subscribers?

Jeff Wang

The reason why we actually attribute most of the cash revenues of the $8.18 million to new subscribers is currently our renew fee for existing subscribers is substantially lower than their first-time payment. So in that sense, if they renew they do not contribute significantly to our cash revenues.

C. Ming Zhao - Susquehanna Financial Group

Okay, so it is like the first time, you charge a very high fee and then, to reward them as an old client, you charge much less, right?

Jeff Wang

Yes, we charge much less to retain them. At the same time, because we now offer multiple categories of products, that includes technical analysis, fundamental analysis and also includes stock quote information such as Level Two codes, so there will be migration from -- the customers will migrate from one product category to another. In this sense, they can actually contribute more cash revenues.

So basically we view -- I’m sorry. Basically we are regarding this as an up-selling strategy.

C. Ming Zhao - Susquehanna Financial Group

Okay. May I have one final question on the sales and marketing expense? This line, is that basically the call center cost? Do you have any other type of -- of course, your sales people wages and those -- is there anything else in it?

Jeff Wang

These are mostly the wages and also wages and commissions for the sales team. So up this year, we haven’t done any actual marketing campaigns so actually we are [planning] for some advertising activities. So most of them actually should be payroll and also compensation and bonus, and also there’s depreciation of hardware and also travel expenses. So most of them, about -- let me see, about 80% are compensation related expenses.

C. Ming Zhao - Susquehanna Financial Group

But if I look at the historical sales and marketing expense, you have a big ramp up in the fourth quarter last year from about $300,000 to $1.3 million. That increase, is that because you acquired the Stockstar.com and the Genius? So in other words, if I remove the sales and marketing expense from your current expense, the part for your original JRJ part is only like $300,000 to $400,000.

Jeff Wang

Well, that kind of simple calculation may not be reasonable in our case, for a couple of reasons. First, our cash revenue starts to improve significantly in the Q4 2006 and it is kind of a coincidence. Several things happened in Q4 2006. First, of course, there was the acquisition of Stockstar and Genius. That added because of the increased headcount of our businesses, we incurred more sales and marketing expenses in terms of the compensation expenses.

At the same time, we also increased our sales and market -- our telemarketers headcount in Q4. Actually, starting from the latter part of Q3 of 2006. That also contributed an increase of the sales and marketing expenses in Q4 2006.

Also, our cash revenue from the individual subscriber business actually increase significantly in Q4 2006, so in Q4 2006 our cash revenue is $5.4 million and accordingly, we actually -- the bonus related expenses, the commission-based related expenses also increased in Q4 2006.

There’s several reasons actually, not by coincidence, that they happen in the same quarter of 2006.

C. Ming Zhao - Susquehanna Financial Group

Okay, I see. That’s very helpful. Thank you very much.

Operator

(Operator Instructions) The next question is from Alex Xu. Please go ahead.

Alex Xu - Brean Murray Carret

Hello. Can you hear me? Hello?

Operator

Yes, sir. Please go ahead.

Alex Xu - Brean Murray Carret

I have a couple of questions. First of all, on the cash side, it looks like you have a pretty good cash position. Can you comment a little bit in terms of where is your intention with $56 million on the balance sheet in terms of -- because your expansion for the most part does not need that much of a cash investment there, and also you are generating free cash flow pretty much every quarter. So can you comment on that a little bit?

Jeff Wang

Our cash position, as you said, Alex, our quarterly sales generate very positive cash inflows and net cash flows, so our cash position will primarily be used for strategic acquisitions. That includes for acquisitions of complementary resources and capabilities that can help us to drive the growth of our business.

Alex Xu - Brean Murray Carret

Okay. Do you have a target or target area you are looking at in terms of strategic acquisitions that right now you are thinking about?

Jeff Wang

Well, actually we have several areas that we look for in terms of acquisitions. First, as I said, we are looking for strategic acquisitions that can enhance our existing resource and capabilities. That may include, for example, a platform where we can actually attract more potential customers. That may include, for example, websites.

Also, for example, the Stockstar.com acquisition contributed significantly to our web traffic, which has played an important role in screening and maintaining potential customers. And we can look for acquisitions that can reinforce our fundamental capabilities. That includes acquisitions, for example, of Genius, which has a very solid foundation, so to enhance our capabilities providing high quality financial data to serve not only the free visitors of our websites but also to the fee-based active subscribers to our subscription packages.

But we are also looking for other businesses where we can find to help us to monetize a greater portion of our registered users to our website. Now we have 3.7 million registered users of two websites, jrj.com and Stockstar.com. But we only customize less than 1% of this huge customer base, user base with our currently subscription based business. So we are also looking for other opportunities that can help us to monetize this user base.

Alex Xu - Brean Murray Carret

Okay, and then I look at your tax rate this quarter, obviously you have another tax credit, basically. My question is how many quarters will it take for the tax loss carryover from the two acquisitions being used up? Is it like in the next couple of quarters or probably longer in 2008?

Jeff Wang

Actually, the tax credit mostly comes from the losses carried forward from Stockstar.com and also from Genius, so basically these two business prior to the acquisition by us, actually they lost money for quite some years. That’s why they have a sizable amount of loss carry-forward that can be used to offset the net income in our business.

We believe that this tax credit will be used up in a couple quarters.

Alex Xu - Brean Murray Carret

Okay, thank you. And lastly, if I look at your -- there’s a question that a previous caller asked about the renew fee versus the initiation fees for your subscribers. Is that right, that the first time they subscribe to your software, they pay let’s say $100 and then the next time, a year later when you renew the subscription, they pay substantially less than $100. Is that how this thing works?

Jeff Wang

Let me elaborate on this point. While we have different renew policies for different kinds of products, and we do actually ask for a substantially lower renew fee for the Grand Reference series. The reason why we actually ask for a lower renew fee is we migrate a significant portion of the Grand Reference users to the Value Engine series, which is a much higher priced product series. So in this sense, we can increase the ASF contributed by these Grand Reference subscribers. So basically it is a strategy we use for upselling to these customers.

Alex Xu - Brean Murray Carret

Okay. Thank you and congratulations on a great quarter.

Operator

(Operator Instructions) The next question is from Mr. Dick Wei from J.P. Morgan Hong Kong. Please go ahead.

Dick Wei - J.P. Morgan

Just a couple of follow-up questions; the first one is if you can tell us more about, if you have more new products for the second half of the quarter -- I’m sorry, for the second half of the year, both in the institutional side and individual subscription side, that would be great. Thanks.

Jeff Wang

We do actually have product development as a key area in 2007, and there are a couple of areas where we are focused on in terms of product development. The first is in terms of stock analytical tools, actually our product categories have been stabilizing which, as we mentioned earlier, that includes three categories, fundamental analysis, technical analysis and also securities information series, that’s the Level Two quote series.

We are fine-tuning these three categories by improving the functionality and also the presentation in a more user-friendly way and also we try to deliver more versions to suit different needs of the customers. That is one key area of our product development.

The second area is we are evaluating -- actually, we try to actually deliver more low-priced products that we can try to expand our fee-based customer base and significantly increase the fee-based customer base is instrumental for us to build a healthy structure, customer structure. And that can generate long-term revenue growth for our business.

Third is we are also evaluating and also working on product development for some of the new financial products to be approved by the Chinese Government, especially in the CSRC, which is the counterpart of the SEC in the U.S. For example, stock futures index, although actually it hasn’t been officially been approved yet but it is early in the pipeline of the CSRC’s agenda, we are preparing for that as well.

Dick Wei - J.P. Morgan

Okay, great. My next question is more on the cost side. The G&A expenses went up quite a lot during the quarter. I wonder, has it been stabilized in the absolute level? And if you can also comment on the longer term margin trend, the operating margin trend, that will be great. Thanks.

Jeff Wang

In terms of our G&A change for this quarter, basically there is about -- actually $200,000 fee. Actually, this is our professional fees for SOX compliance. We believe the most -- well, we’ll be actually SOX compliant -- this should be completed by the first quarter of 2008, so the existence of that shall be eliminated starting from the second half of 2008.

And the rest -- most of the rest of it actually, the G&A increase comes from the share-based compensation expenses. And this is because of the steady increase of our stock price in the past quarter and actually we expect this expense to increase as well in the future.

Also, we will actually issue more options for new hires and also to increase the retention of the existing management team. We believe that the share-based compensation expense will increase.

Dick Wei - J.P. Morgan

What about for the margin trend going forward? If you exclude the share-based comp, the margin is roughly 29% operating margin.

Jeff Wang

Well, in terms of the operating margin excluding the share-based compensation, what we expect is we expect the margin to be improved in 2008. So the reason is while we are positioned actually to improve, to increase, to leverage our existing resources and that adds more expenses. Not just G&A expenses but also the sales and marketing expenses because of increased headcount.

But after our cost base stabilizes in the second half 2007, we believe our profit margin will improve in 2008.

Dick Wei - J.P. Morgan

Okay, so for the rest of ’07, should I expect mid-20s or to the 30% level for operating margin?

Jeff Wang

That would be reasonable.

Dick Wei - J.P. Morgan

Okay, great. That was very helpful. Thanks a lot.

Operator

The next question is from Jeffrey Chow from [inaudible] Management. Please go ahead. Mr. Chow, you can go ahead.

Jeffrey Chow

Congratulations for a great quarter. I have one question and I saw an inflation trend in China and I feel that everything is going up and does your company have a plan or schedule to increase the subscription fee? If so, if you do, what percentage do you expect for that?

Jeff Wang

Let me just actually repeat your question, just to make sure I understand your query. So basically your question is whether we plan to increase our average subscription fee, given that there is --

Jeffrey Chow

Inflation in China, yes.

Jeff Wang

-- inflation challenge in China, right? Okay, so in terms of inflation, it is a very minor consideration in terms of our pricing strategy. Our pricing is basically based on the customer needs and not how we can help the customer create value, so it has very little correlation with inflation.

Jeffrey Chow

Okay, so right now you don’t have a schedule to increase the subscription fee for now?

Jeff Wang

We have different pricing strategies for different products. So basically we may, for example, increase the prices for certain products but in general, we plan to actually roll out more low-priced products to gather a significantly more number of fee-based subscribers. That is our strategy. If that is successful, that may actually drive down our ASF, although the prices for specific products may go up in terms of different pricing strategies.

Jeffrey Chow

Okay, I understand. Another question is about I went to your website. I notice sometimes you have the limitation -- like okay, I just distribute the next 30 copies or 50 copies for this product and do you expect your company will lift the bar of the restriction in the near future and you can sell as many as you want, right?

Jeff Wang

Yes, of course, but actually because we -- as a company, we have to focus on creating value for our customers, improving our products and upgrades every single product series. As you can see, we significantly increased our product development expenses in Q2 compared to Q1. That mostly comes from the compensation expenses from the product development team.

We have been working to roll out more upgrade versions of our product and in that sense, that is our strategy and we have no intention to change that. For that reason, we might have limited edition because we will upgrade to a higher version with more --

Jeffrey Chow

Okay and can you give a number -- what’s the percentage for the lower version upgrade to the higher version?

Jeff Wang

Of the customers, right? Or of our products?

Jeffrey Chow

As for customer-based, you know, customer number and what is the percentage of the customers who will upgrade based on your strategy?

Jeff Wang

When we roll out a newer version, it doesn’t mean that our existing customers will pay a premium to get upgraded. It really depends on the customers, their own demand for our product. At this stage, we do not have this statistic available.

Jeffrey Chow

Okay, and the next thing, it’s not a question. It might be just a suggestion. I understand that your company might not have the financial analysis and the technical analysis and the three areas you mentioned, these product series. Have you ever heard of something like the [forex] money trading system? It’s kind of in the U.S. right now. Maybe you guys can introduce such a new product in China. I think it might work and -- have you ever heard of that?

Jeff Wang

We do have a couple of our analysts, they are actually evaluating this kind of technology. But it really depends on how much, a number of customers we can attract and also at this stage, we haven’t come to the conclusion that this is a sizable business yet.

Jeffrey Chow

I understand, because this is primarily in the U.S. and they charge a lot. It’s a high-end product and yes, maybe you guys can do something there. I’m not really sure but I think it’s another opportunity for that and I think you guys might perform better in the future if you keep on introducing the new product lines and provide a service to the investors. Anyway, okay, thank you. I got it.

Operator

Thank you. The next question is from [Ji-hoon Wei] from [Barker] Investments. Please go ahead.

Ji-hoon Wei - Barker Investments

Thank you. Congratulations for a new, very interesting quarter and very productive quarter. I have one question regarding your competitors. Who are your closest competitors in your field of the business you are involved in in China?

Jeff Wang

We actually believe our major competitor is ourselves in terms of our business. The reason is, as you can see in terms of revenue, on a quarter revenue we now only have about $5.7 million in Q2.

What we believe is in terms of information services to be provided to the individual investors in China, we believe the market size would be between $1 billion and $10 billion, depending on what kind of product you can roll out to help investors. In this sense, even though we are the market leader in this sector, our revenue base is really negligible in terms of this huge market size.

Secondly, judging from the number of our subscribers, we only have at this moment 37,000 previous customers, which is less than 1% of our fee-based, our registered users of our two websites. Also, in China, as of this moment we believe there will be at least 50 million stock investors. The reason is actually in May of this year, the number of stock trading accounts has surpassed 100 million, because in China every investor can open two accounts, one with the Shanghai Stock Exchange and another with Shenzhen, so basically, to be conservative there will be at least 50 million stock investors.

So if we compare our previous customers to these 50 million stock investors, we still have a huge growth potential. So in this sense, our biggest competitor is ourselves. We are competing against ourselves.

But in some certain aspects, of course we are competing with other major players in the market. For example, in terms of web traffic, because even though we own two websites, jrj.com and Stockstar.com, we do compete with other financial verticals or the financial channels of the major portals in terms of grabbing the eyeballs to retain potential customers for our business. So in this sense, we are competing with homeway.com and also [itsmoney.com], and also the Sina finance channel and Sohu finance channel.

Ji-hoon Wei - Barker Investments

So what specific steps have you been taking to try and make yourself more visible to the ever-growing number of investors in China?

Jeff Wang

Well, the major step is to help, to consistently and continuously improving the content and also the functionality of our website. Because we already have substantially over 20 million unique visitors to this website, our two websites already have enough visibility among Chinese stock investors. What we want to do is, what we need to do is to retain them rather than to purely attract more traffic. So what we need is the quality of our visitors and also the quality of the product and services -- I mean free products and free services we provided to these customers, these visitors to retain them and also to screen them. This can help us to drive the growth of our business for the previous customers.

And also, we may in the latter part of this year, we also may consider actually some marketing campaign in terms of promoting the branding of the website as a way to increase not just the brand awareness but actually the brand equity of these websites, jrj.com and Stockstar.com.

Ji-hoon Wei - Barker Investments

Thank you. Congratulations again for a great quarter.

Operator

(Operator Instructions) There are no further questions on the phone.

Melissa Zhang

All right. That’s all for today’s conference. If you still have any further questions, please call our IR group at 8610-5832-5288. 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 Q2 2007 Earnings Call Transcript
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