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Executives

Alice Yung - Investor Relations

Zhiwei Zhao - Chief Executive Officer, Director

Jeff Wang - Chief Financial Officer

Analysts

Alex Xu - Brean Murray Carret & Co.

Peter Chen

Orin Wong - Individual Investor

Anindya Chatterjee - Jefferies

C. Ming Zhao - Susquehanna Financial Group

Analyst for Dick Wei - J.P. Morgan

Chris Fox - I.N. Fox Capital

China Finance Online Company (JRJC) Q4 2007 Earnings Call February 28, 2008 8:00 PM ET

Operator

Thank you all for holding and welcome to the China Finance Online fourth quarter and full year 2007 earnings release conference call. (Operator Instructions) I would now like to turn the conference over to your host, Ms. Alice Yung. Go ahead please, Madam.

Alice Yung

Thank you, Operator. Hello, everyone. Welcome to China Finance Online’s fourth quarter and full year 2007 earnings release conference call. Joining me today in the conference are our CEO, Mr. Zhiwei Zhao, and our CFO, Mr. Jun Wang. After market close today, we issued a press release containing the financial results for the fourth quarter and full year 2007. The purpose of this conference is to provide detailed information regarding those financial results. Following our formal remarks, we will be happy to take any questions you might have.

Before we start, it’s my duty to remind you that during today’s conference call, we will make some forward-looking statements, including statements about our future development, our market position in individual and institutional markets, and our first quarter and full year 2008 guidance.

The 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 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, fluctuations in quarterly operating 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 investment 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 statements except as required under applicable law.

Now I will turn the call over to our CEO, Mr. Zhao.

Zhiwei Zhao (Translation)

Hello, everyone. Welcome to China Finance Online's 2007 fourth quarter and full year earnings release conference call. In the fourth quarter of 2007, China’s stock market experienced significant volatility, after reaching the historic highs of the Shanghai composite index and the Shenzhen component index in October 2007, Shanghai Stock Exchange and Shenzhen Stock Exchange both declined dramatically, more than 20% on average. However, China Finance Online still achieved great success in operations due to our flawless execution.

In this quarter, our revenues from operations still came in at a high range. Net revenues and [inaudible] were $8.88 million, representing an increase of 252% from the same period of last year and a 22% increase from the previous quarter. Meanwhile, net operating cash flow [took] a sizable increase in this quarter, among which cash inflow from subscription services provided to individual customers, our core business, were reported as a new historic high of more than $13.7 million, which is even more than the total cash inflows from this service line in the entire year of 2006.

The volatility of China’s stock market has had an unfavorable impact on our business. [Our team’s] execution and [anti-risk] capability have been again improved by our outstanding achievements in the fourth quarter.

From an operations perspective, our operating results continued [the growth trend] in the fourth quarter of 2007. By the end of December 2007, registered user accounts at jrj.com and stockstar.com increased to 9 million, up by 0.9 million. Subscription service users were up to 56,200, an increase of 24% from the previous quarter.

Our success we achieved in the fourth quarter 2007 is a result of our strategy of combining organic base and external strategic acquisitions and partnerships. Based on the excellence of our management, we created our unique competitive advantages through the complementary sources and capabilities that came through our strategic acquisitions and partnerships in this quarter and we made significant progress in the following aspects.

First of all, China Finance Online announced that it has entered into a strategic alliance agreement with China Telecom, the largest wireline telecommunication and broadband service provider in China. The co-branded finance channel, JRJC-Vnet Finance, has already been officially launched. Meanwhile, China Finance Online will provide wireless customized subscription based financial information and analytical products dedicated to China Telecom’s broadband users, including free-trial and fee-based versions. These products will be [inaudible] for the Vnet portal as well as the over 10,000 business outlets in China.

This collaboration with China Telecom is strategically important to us. We now have the opportunity to provide our diversified premium financial information services for more than 40 million broadband users of China Telecom through its nationwide online and offline networks. This enables us to penetrate into [satellite] markets. This strategic move will further stabilize our leading position providing financial information, data, and analytics in China and also brings us a unique opportunity to further enhance brand awareness of China Finance Online among Internet users.

Moreover, as an important step towards the strategic transformation of China Finance Online, the company successfully completed the acquisition of Daily Growth Investment Company Limited in November 2007, a licensed securities brokerage firm incorporated in Hong Kong, and we made a smooth progress integrating these operations. Daily Growth [moved] its main office located in central Hong Kong. At the same time, Daily Growth is upgrading its online trading platform for its future development.

We will provide diversified financial products and value-added services to our registered users, which will utilize premium resources from Daily Growth and China Finance Online. We can provide securities brokerage services to the users of our websites, jrj.com and stockstar.com. It will add more value to our existing financial information services and at the same time to improve the brand awareness of Daily Growth, a premium brand with 36 years of history.

In January 2008, we were certified by the Shanghai Stock Exchange Information Network Company Limited, which is associated with the Shanghai Stock Exchange, to distribute TopView, a recently release series of trading data and statistics for stocks listed on the Shanghai Stock Exchange. Based on TopView data, we successfully developed a new product series named TopView, which was officially launched in February 2008. TopView reveals valuable statistics, such as trading volume and prices of various types of trading accounts, which give investors unique insight to identify and analyze the trading activities of major market participants and help investors make better decisions. The new product series will create a new potential for future development of China Finance Online.

Furthermore, we emphasize that the advantage of our website as premium platforms to attract and retain our target customers after obtaining the positive results of the first China stock investment competition among retail investors. JRJ.com and stockstar.com, together with China Telecom, our strategic partner, the Securities Channel of China Central Television, the largest and most influential TV station in China, China Securities Journal, one of the leading financial newspapers in China, and [Haitun] Securities, one of the top brokerage firms in China, have decided to host the nationwide 2008 second China stock competition among retail investors in January 2008. We believe that this competition will further enhance and strengthen our market [inaudible] among both individual and institutional investors.

In 2005, the company acquired a minority interest in Moloon, a provider of mobile stream media technology and services. Due to Moloon's deteriorating financial conditions, a non-cash investment impairment of $11.13 million was recorded in Q4 2007 against the company's minority interest investment in Moloon. Since China Finance Online's investment in Moloon is primarily from a financial perspective, the non-cash impairment charge against the investment in Moloon will not have any adverse impact on China Finance Online's business growth.

Based on the excellent performance of the combined operation and continuously improved execution capability, our management team is very confident with the company’s future development. The company now raises it projected net revenues for 2008 to a range from $54 million to $61 million, compared to the previous guidance of $50 million to $60 million. Accordingly, the company also raises its projected adjusted earnings for 2008 from the previous guidance of $22 million to $28 million to the range of $24 million to $29 million.

Finally, I would like to take this opportunity to express my great appreciation to our investors, 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 detail on the financial part. Thank you.

Jeff Wang

Thank you. Hello, everyone. Welcome to our fourth quarter and full year 2007 earnings conference call. China Finance Online is positioned to provide an integrated portfolio of products to both institutional and retail investors in China, and currently our core business is to provide subscription-based, value-added financial information data and analytical tools to help retail investors make well-informed investment decisions. By the end of 2007, stock trading accounts in China reached 180 million. In China, a stock investor can open no more than two stocks in their account, one with the Shanghai Stock Exchange and the other with the Shenzhen Stock Exchange, which implies that in China there are at least 70 million stock investors by the end of 2007.

The stock market in China experienced severe correction in the fourth quarter of 2007 with the Shanghai Composite Index down over 20% from late October to the end of November. Despite the severe correction of the China stock market, cash inflow from subscription services provided to retail investors in China, our core business, set a new record of $13.73 million, up 24% compared to $11.06 million in the past quarter.

Net operating cash flows for the fourth quarter of 2007 were $10.91 million, up 72% compared to $6.33 million in the third quarter.

Our record performance was driven by our improved telemarketing capability, customer support, product development, and a steady increase in both the paying subscriber and the registered user accounts of our leading websites, jrj.com and stockstar.com.

Active paying retail subscribers grew to 56,200, up 24% from the previous quarter. Registered user accounts of jrj.com and stockstar.com grew to 9.0 million, an increase of 0.9 million from the previous quarter. Driven by strong cash revenues from retail subscription business in five consecutive quarters in Q4 2006, cash revenues in Q4 2007 were reported at another record high level of $8.8 million, meeting the company’s previously updated guidance, and up 252% year over year and 22% quarter over quarter.

Subscription services provided to retail customers, our core business, represents approximately 87% of net revenues in Q407, compared to 84% in Q3. Net revenues from this service line totaled $7.76 million in Q4, up 319% from $1.85 million a year ago and up 26% from $6.16 million from the previous quarter.

Deferred revenues in this quarter was a recorded $25.12 million, up 33% from $18.84 million in the third quarter. For our subscription business, retail subscribers pay the entire subscription fees up-front in cash for services to be received over a stated period of time, typically 12 months. Under U.S. GAAP, such prepaid cash subscription fees are recognized as the net revenues basically over the stated period and prepaid service fees made by customers for subscription services that haven’t been rendered at the end of a quarter are recorded as deferred revenue in the balance sheet. The significant increase in deferred revenue for the fourth quarter is due to strong increase in prepaid subscription fees, which will be recognized as revenues under U.S. GAAP in the next several quarters.

In this quarter, advertising related business brought in $408,000 compared to $504,000 in the third quarter. Our websites, jrj.com and stockstar.com, are both considered platforms where we attract potential pay subscribers for our core retail subscription business. In Q407, we continued to allocate the most online advertising inventories to promote our own subscription packages and brands, as well as establishing partnerships to increase traffic volume to this website. For that reason, online advertising will not be considered as a sizable service line of our business in this quarter, nor do we expect it to be so in 2008. And therefore, [advertising business is our focus] for strategic reasons. In 2008, we do not expect to significantly grow our advertising business.

We completed the acquisition of Daily Growth, the Hong Kong brokerage firm, on November 23, 2007 and this is the first quarter that we consolidated Daily Growth’s financial results. Revenues from the securities brokerage business provided by Daily Growth were $81,000, representing 1% of net revenues for the quarter.

We are still in the process of integrating Daily Growth with our existing operations and upgrading the systems for Daily Growth and therefore we do not expect Daily Growth to make a sizable contribution to our financial results in the first half of 2007.

Gross margin was 85% in the first quarter, up from 75% in the same period in 2006 and from 84% in the third quarter of 2007. The improvement in our gross margin is primarily due to the growth of retail subscription business, which has higher gross margins. Please note that the cost of revenues for the quarter for the first quarter of ’07 included website maintenance and development expenses of $903,000. Excluding website maintenance expenses, the gross margin for the fourth quarter of ’07 would have been 95%.

Operating expenses for the fourth quarter totaled $5.93 million, compared to $4.67 million in Q307. The increase from Q307 is primarily due to higher commission and bonus expenses, in line with the strong core business results, the increase in marketing expenditure to enhance brand and product awareness, as well as the increase in professional service fees, mostly related to Sarbanes Oxley readiness project.

In the fourth quarter, income from operations was $1.77 million compared to operating loss of $741,000 for the same period in 2006 and income from operations of $1.44 million in the third quarter of ’07. Excluding share-based compensation, income from operations for this quarter would have been $2.64 million.

In the quarter, the company recorded an investment impairment of $11.13 million against our investment in Moloon International Inc., reducing the carrying value of special investments on our balance sheet by 88%, from $12.61 million to $1.48 million, and we do not have any cost-based investment other than Moloon.

We do not consolidate Moloon’s financial results and an impairment charge against this investment will not have any negative impact on our operations and our 2008 guidance. Therefore, we believe that when assessing our performance and when planning or forecasting future periods, both management of China Finance Online and the investors would benefit from referring to non-GAAP financial measures which exclude share-based awards granted to employees and the impairments in our investment in Moloon.

In the fourth quarter ’07, non-GAAP operating profit was $2.64 million, an increase of 5% from $2.62 million in the first quarter and compared to non-GAAP operating loss of $560,000 in the fourth quarter of 2006.

Net loss for this fourth quarter was $8.37 million. Excluding investment impairment from Moloon, and the stock-based compensation, non-GAAP net income for the fourth quarter would have been $3.63 million, compared to non-GAAP net loss of $149,000 in the fourth quarter of 2006 and up 22% from $2.98 million in the previous quarter.

Net loss for the full year ’07 was $4.13 million, compared to net loss of $600,000 for the full year ’06. Excluding the investment impairment in Moloon and the stock-based compensation expenses, non-GAAP net income for the full year ’07 would have been $9.94 million, up 422% year over year.

Non-GAAP net income margin for the fourth quarter was 41% compared to negative 6% in the same quarter last year. Non-GAAP net income margin for the full year 2007 was 38%, up from 27% in 2006.

Our cash and cash equivalents were $74.73 million by the end of 2007, an increase of $10.65 million from the previous quarter.

Regarding our outlook for Q1 2008 and beyond, we currently expect to generate net revenues in an amount ranging from $10 million to $10.5 million for the first quarter of 2008, representing a 150% to 163% increase from the corresponding period in 2007. On a non-GAAP basis, we expect adjusted earnings, which represent net income excluding share-based compensation expenses, to be between $3.7 million and $4 million for the first quarter of 2008, representing a 217% to 242% increase year over year.

Backed by record deferred revenues and operating cash flows from our product pipeline, a steady increasing in registered user base and continuous enhancement in telemarketing capabilities, as well as our recent partnerships with Shanghai Stock Exchange and China Telecom, we now raise our projected net revenues for 2008 to a range from $54 million to $61 million, compared to the previous guidance of $50 million to $60 million. Our updated revenue guidance represents 108% to 136% growth from $25.9 million in 2007. Among the $25.12 million deferred revenues on our balance sheet at the end of 2007, current deferred revenues with an amount of $20.46 million won’t be recognized as net revenues in 2008 under U.S. GAAP. That is one-third of our updated 2008 net revenues guidance are already available based on our deferred revenues on the balance sheet, as long as we are able to deliver the subscription service for our customers.

We also raise our projected adjusted earnings for 2008 to the range of $24 million to $29 million, or $1.04 to $1.26 per fully diluted ADS, based on an estimated $23 million ADS outstanding. Our updated guidance on our adjusted earnings represent 141% to 192% growth over $9.94 million of non-GAAP net income in 2007.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question is coming from Alex Xu from Brean Murray.

Alex Xu - Brean Murray Carret & Co.

A quick question first of all -- I probably missed the first part of the conference call. Did you guys announce the cash revenue number for the quarter, number one? And number two, also what is the -- what was the ASP or average selling price per user during the December quarter?

Jeff Wang

First actually, we disclosed cash inflows from retail subscription business in our earnings release. Let me -- our cash inflow from retail subscription business totaled $13.73 million compared to $11 million last quarter, up 24%. And talking about the average subscription fees for our subscribers in Q3, it’s about $48 per month.

Alex Xu - Brean Murray Carret & Co.

Forty-eight dollars per month, so it’s roughly say close to $600 per year, basically.

Jeff Wang

Yes.

Alex Xu - Brean Murray Carret & Co.

Right, okay. And then on the general kind of a question -- you guys mentioned that Daily Growth, the brokerage in Hong Kong, as well as the China Telecom partnership, in the same time you’ve since talking about the -- you know, you made the discussion with additional partners. Can you just guide us through in terms of what kind of partners or what’s in general the direction you are looking at to form this kind of partners?

Jeff Wang

Well, I would suggest our CEO may be in a better position to answer this question about the strategic partnerships.

Zhiwei Zhao (Translation)

As I mentioned in my previous speech, we have been actively looking for those complementary sources which could contribute to the increase of paying subscribers, and also to utilize our current market user base.

At the end of 2007, we have over -- we have 9 million registered users from our two leading financial websites, jrj.com and stockstar.com. As those registered users do have increasing demands on our products [outside of] our current financial information services. As I mentioned in November 2007, we acquired Daily Growth, the Hong Kong brokerage firm, a Hong Kong securities brokerage firm. This actually is our first try to provide more new services to our current customers.

We have two criteria to choosing our partners. The first one is we aim to increase the number of our registered users and paying subscribers. The second one is we try to look for those complementary sources to provide these new value-added services to our current customers. We have been working very hard in this direction. Thank you.

Alex Xu - Brean Murray Carret & Co.

And thank you. The last question I have is in the past, you guys were talking about potentially looking at a domestic brokerage license. Can you update us in terms of how far away you are from that goal and what kind of direction -- in the past you were also talking about the cost of such an acquisition probably running around $20 million. Is that still the target price you are willing to pay? And also just update a little bit on what the progress is you are making on that front. Thank you.

Jeff Wang

Well, our company, China Finance Online, actually will position us to provide a fully integrated portfolio of services and financial [products] to our customers. That in addition to the current business value-added service -- [inaudible] permission services, we do not rule out other possibilities, including for example our recent acquisition of the Hong Kong brokerage. But it takes time and it often takes actually different processes to evaluate other acquisition targets. And so when we are ready to announce the [target], we are -- it’s not appropriate for us to discuss openly about this other alternative.

But we do focus on adding other service capabilities to further monetize the traffic, the user base to our website and to further generate additional revenues from each subscriber, each user on our website.

Alex Xu - Brean Murray Carret & Co.

That’s fair enough. Thank you. Congratulations on a great quarter. Thanks.

Operator

(Operator Instructions) Next question is from Peter [Chen] from [inaudible]. Mr. Peter Chen, your line is now open. You may ask your question. Thank you.

Peter Chen

Okay, guys. It seems the management keeps raising the 2008 guidance, so I want to know why you guys are so bullish, considering the fact that the Asia market has been volatile and it seems that it is facing a lot of downward pressure. I’m just wondering -- is that the 2008 guidance based on the management’s assumptions that the Chinese stock market will remain bullish in 2008? That’s my first question.

My second question is that you guys said that the subscription fee is $48 per month. Would that fluctuate according to the market conditions in the Chinese stock market, which in turn affects the gross margin? Thanks.

Jeff Wang

Peter, first I’ll answer your question about whether the -- when we give out guidance, that we assume that the Chinese stock market will maintain bullish in 2008. Actually, in our guidance that we are factoring into a certain volatility in the Chinese stock market and the growth -- the reason that we increased our guidance is based on a couple of reasons.

First, as I mentioned during the [inaudible] speech, by the end of 2007 we already have over $25 million in deferred revenue on our balance sheet, among which over $20 million was recognized as net revenues in 2008, which already accounts for over one-third of our guidance in 2008. That actually gives us a lot of buffer.

Secondly, we have been significantly increasing our telemarketing capabilities and also roll out more products and increase the registered user base of our website, so our strategy has been working very well in the past almost a year-and-a-half that our strategy is to utilize more telemarketing teams to more effectively sell more products to more potential customers from our website and that strategy has been very successful, regardless actually of the market volatility in this space.

Talking about the ESF and the ARPU per month of $48, we expect our ARPU may reduce in 2008 because our goal is to substantially increase our subscriber base. But the decrease in ARPU will not be attributed to a decrease, a discount to our existing products. Our strategy is to roll out more low-end products, especially through our recent partnership with China Telecom. So our strategy is to substantially increase our low-end subscribers and then use telemarketing to promote to these low-end subscribers to substantially increase in turn to our high-end subscriber base, leading to the growth of our revenues and top line.

Peter Chen

Okay, another question I just came up with, you guys have $74 million cash -- what kind of acquisition are you looking at in 2008? How will the failure in the Moloon investment affect the company’s future strategy in acquisition?

Jeff Wang

First, talking about Moloon, you know, we have the investment. First, the Moloon investment is a different story from the other acquisition we made in the middle of 2006. When the Moloon investment was made in late 2005, at that time China Finance Online was a troubled business and we hadn’t repositioned our business model yet. And since the middle of 2006, we repositioned our business model to become the leading company to provide an integrated portfolio of financial service products to our customers.

And now actually, all the acquisitions we made in the past, including Stockstar, Genius, which is the first financial database provider in China and also Data Growth, all these acquisitions, we focused on acquiring strategic resource capabilities to enhance our capabilities to serve our customers. And talking about these future acquisitions will take this direction to follow, to enhance our capabilities.

Moloon -- after Moloon start to shift their strategy from a mobile value-added service provider to an online gaming provider in late 2006, from our perspective the Moloon investment is a pure financial investment. It’s not from a strategic perspective.

In late 2005 when we initially invested in Moloon, actually we have focused on strategic opportunities to leverage the resource from Moloon to deliver services to our customers through the mobile handsets. And then in 2006 when we acquired Stockstar, we already acquired the mobile service capability and Moloon from this perspective is no longer important to us and therefore, it won’t be -- the impairment or even the disposal of our investment in Moloon in the future will not have any negative impact in our operations because we already have the mobile services capability.

Peter Chen

Okay, thanks.

Operator

Thank you. The next question is coming from [Orin Wong], an individual investor from the U.S.A. Go ahead, please.

Orin Wong - Individual Investor

So you have two things for me, right? Friday? Okay.

Operator

Mr. Wong, your line is open. Please go ahead.

Orin Wong - Individual Investor

I’m sorry. This is Orin Wong from the United States. I check the website, a very [attentive] reader of your website. I noticed that you have a partnership with MetLife, an insurance company from the United States. Could you give us some detail on what kind of partnership that is and what are the revenues or how this partnership is fitting to your strategic goals?

Jeff Wang

Well, our partnership with MetLife was actually MetLife is actually to distributing MetLife’s life insurance product in China. It is a [test trial business] and non-strategic to the company at this stage because our goal in the future is to try to deliver, in addition to value-added financial information services, we’re also deliver other financial service and products to our user base of our website.

Some of this product that will be delivered through a partnership with other financial institutions, including for example MetLife. But at this stage, we are -- we would rather focus on securities related services, not insurance. That’s why actually we don’t think the MetLife partnership at this stage is important. And the contribution from that trail-based partnership is immaterial.

Orin Wong - Individual Investor

Okay, thank you. I think that your revenue is dependent on the performance of the stock market. What are the counterbalances that you can provide in case the stock market doesn’t work out for an extended period of time?

Jeff Wang

First, the stock market conditions, that has an impact on our business but that doesn’t mean that our financials will fluctuate with the stock market. And even when the market becomes volatile, it will make actually investors believe that investment -- some investment is a [inaudible] process and they need to do more homework actually to make better decisions. In this sense, we don’t believe that in a continuous slightly down-leading stock market will have a huge negative impact on our performance.

In addition, as I mentioned when I answered the other question, that we are enhancing our capabilities, including telemarketing, increasing the user base of websites and also increase the rollout of our more products and services, including financial services products. And it’s through this partnership and through this capabilities, we can enhance the monetization of the user base of the website as a buffer to the negative impact, if any, from the stock market movement.

Orin Wong - Individual Investor

Okay. I have one last question -- you mentioned previously that you basically feel advertising resources for partnership, down the road, how soon do you expect that you can generate more revenue from advertising? Because I know that a lot of people watch or read -- you know, both your websites is a magnet of attention. A lot of people -- it attracts a lot of eyeballs and when are you going to monetize your [existing] resources to generate advertising revenue down the road? Is it two years from now or three years from now when advertising will become a significant source of revenue?

Jeff Wang

I will say in the future, China Finance Online will not generate substantial revenues from advertising because a strategic advertising business is our focus. So our business model is similar to alibaba.com and Tencent in China, because we all use our websites as a customer attraction and acquisition platform. We are serving the retail investors in greater China and we use our website to attract customers to our website and we provide personalized content to get the user registered and then we get as much information about these investors as possible to understand them.

So in addition, we promote our subscription based services on the website, so we must utilize the advertising space to promote our own services and brand. So there’s a conflict between advertising and subscription business.

If we look at alibaba.com, if we look at Tencent, these two leading [inaudible] companies in China, none of them, the advertising business is meaningful or material to the company. So we are similar in this perspective.

Orin Wong - Individual Investor

Okay. Thank you.

Operator

The next question is coming from Anindya Chatterjee from Jefferies.

Anindya Chatterjee - Jefferies

A couple of questions; first [around my ignorance], can you please explain a bit more in detail the Moloon investment write-off? It was so large in this quarter itself. There was a similar write-off done in December of 2006 if I am not mistaken but that was a small amount. Why not amortize it over time? Is it an actual loss? How do you actually account for this loss? What is the basic reason behind such a large investment in the first place to go into this? If you could explain this bit, and the second question is the Hong Kong stockbroker acquisition, when do you think you would be able to monetize that, if you take a longer term perspective on that?

Jeff Wang

Well, first mainly about the Moloon impairment, Moloon, as I mentioned earlier, was invested in in December 2005. First at that time I think that the purpose, in addition to adding Moloon, was a very valuable promising investment, that even from a strategic perspective, we wanted to actually utilize their mobile service capabilities to provide a better service to our customers to generate more business opportunities.

But in the middle of 2006, China Mobile and also the Ministry of Information Technology in China, they issued some regulatory changes and those changes had huge negative impact on all mobile value-added service providers, including Moloon. If you look at the other leading companies, including all the listed companies on NASDAQ, Hurray!, KhongZhong.com, Linktone, even TOM.com, I think their sell price is almost half in the middle of 2006.

And we made an impairment a year ago because at that time, first it’s still that we hold preferred shares and we have better protection than ordinary shares. And that’s why we didn’t -- through the independent valuation from [inaudible] that as the conclusion, the write-down at that time was actually only $1.3 million. And in late 2006, Moloon start to take another strategy, try to becoming the leading mobile online gaming services provider in China. And that strategy a year ago, was -- the management team at Moloon [inaudible] the potential listing on NASDAQ in late 2007. And their online mobile gaming business actually started to show some good signs in the first half of 2007 but the result was not satisfactory, starting from the second half of 2007. And also, their cash, their continuing negative impact from the regulatory changes in 2006 still have a huge impact on similar companies.

If you look at other players -- for example, TOM.com, its status on NASDAQ is delisted I think in the middle of 2006 or 2007. And then Hurray! and Linktone, either merged with other companies in late 2007 or were acquired by other companies. And that leaves the companies and management from China Finance Online that we need to seriously evaluate the possibility of whether Moloon, actually we can dispose our position in Moloon. And we’ve been looking to dispose position. We just found out that even at a huge discount to the book value, I mean, we couldn’t sell the stake. And again through the independent valuation from [inaudible] and the results that actually the impairment was $11 million.

So basically to summarize, the impairment was due to the change of the regulatory changes from China Mobile and also the Ministry of Information Technology and also the Moloon, the changing of the business model wasn’t proved to be successful. It led to the deterioration of Moloon’s financial condition and it also led to the impairment in this quarter.

Talking about the Daily Growth Hong Kong business, as Mr. Zhao, our CEO, has mentioned during his speech, we are in the process of upgrading Daily Growth and the online trading platform and also setting up the logistics and trying to integrate with our existing Mainland China operations. We believe that we start from the second half of 2008, we will deliver these kinds of services to our customers.

Anindya Chatterjee - Jefferies

Thank you. In this [connection], the earlier answer to the impairment cost, if I may add, on future investments -- for example, the agreement that you are having for distribution of [inaudible]. You have an annual commitment of payments, if I understand it correct. So this commitment is up-front, whether you get investor -- whether you get subscribers subscribing to this new product or now. What is the risk there you think going forward? Are you looking at a large subscription fee for these added services? In any environment where an average subscriber has an investment outstanding of say $10,000 and the stock market falls say 20% further and they are [inaudible] $2,000 or $4,000, and on top of their loss they have to pay $600 to $2,000 or $4,000 in subscription fees, sounds a little difficult to [measure].

On such circumstances when you are looking at an up-front payment commitment to add a particular service, does it actually -- does it not entail higher risk to your business model at this point?

Jeff Wang

Well, I think that --

Anindya Chatterjee - Jefferies

I just wanted to get your perspective on this.

Jeff Wang

Our up-front commitment regarding the TopView, trading data series with the Shanghai Stock Exchange, is different from our Moloon investment. Our investment in Moloon actually we are -- we are a minority shareholder in Moloon. We actually couldn’t control the company. And so in this actually, we are a passive investor. Not to mention that after they changed their business model, it actually is a pure financial investment from our perspective.

And when we’re talking about the up-front commitments to the Shanghai Stock Exchange, this is actually our own business, this is our own service model. We know this very well. We know how to execute and we know the market will fare well. And talking about the commitment, it’s only about $120,000 per month, which is only about $1.5 million per year. It’s a very small portion of our guided net revenue in 2008, not to mention that even though we know that this is our own business, that we have a demonstrated track record of turning around businesses, including Stockstar, which was losing money when we acquired them. Genius was a troubled business in 2006. We turned around these businesses within a year because we know this business and we know the [inaudible].

And in addition, talking about the TopView data, we already started to release our products, starting from late February 2008, and we are confident about actually the launching of this product and we believe we will generate decent performance in March based on this product. And our revenues from TopView would be -- will well recover our up-front commitment to Shanghai Stock Exchange.

Anindya Chatterjee - Jefferies

Thank you. I’ll hold back in the long for question period.

Operator

(Operator Instructions) The next question is from Ming Zhao from SIG.

C. Ming Zhao - Susquehanna Financial Group

Thank you for taking my question. The first question is Jeff, if I look at your balance sheet and the cash items, it seems like your cash balance has increased but it’s in the foreign currency, it’s about $12 million. So does that make -- is that because you have consolidated the Hong Kong brokerage firm and then maybe you have shifted some money from RMB to the foreign currency to prepare for some investment over there? Is that the reason?

Jeff Wang

Well, our U.S. dollars denominated currency increased in Q4, firstly because actually some employees may choose to access options, [which actually pays] them some cash into the company to [inaudible] stock. And secondly, and the most important reason is actually we [distributed] to Hong Kong, our parent company and we distribute about $12 million. So the reason is after January 1, 2008, our dividend distribution to foreign parent companies will be subject to a withholding tax in China.

C. Ming Zhao - Susquehanna Financial Group

I see. Okay. All right, and another question is in regarding the Hong Kong based brokerage firm business, I guess now the obstacle mainly is the regulatory obstacle, which does not allow the individual investors to remit their money into Hong Kong dollars from Chinese RMB, so could you give us some update -- what’s your expectation that you think this regulatory obstacle could be removed?

Jeff Wang

Well, first in China actually, the Chinese Government does allow the PRC residents to remit foreign currencies abroad through their foreign bank account. And according to the latest regulation from the state administration of foreign exchanges, it is -- Chinese residents are permitted to remit up to $50,000 to their foreign bank accounts.

C. Ming Zhao - Susquehanna Financial Group

Usually investors won’t be able to open a foreign accounts, like bank accounts.

Jeff Wang

Well, we actually -- we’ve been working in the Hong Kong [inaudible], the logistics, how to solve similar problems but through a leading, through a cash management product from a leading [inaudible], actually the best offer, similar services that we can solve this problem. But before we officially launching similar services, we believe this [foreign business], a [secret] perspective, we would rather not discuss the details of these logistics.

But I would like to elaborate on actually the logistics from the Hong Kong banks are in full compliance with the Hong Kong regulatory requirements.

C. Ming Zhao - Susquehanna Financial Group

And lastly, I know you don’t emphasize the online advertising right now but from what you have seen on your major websites, including stockstar.com and your own website, what’s the traffic pattern that you see? Is it growing? Could you give us some thought, if you could? Thank you.

Jeff Wang

Well, our traffic on those websites, sometimes fluctuates a bit on the stock market conditions so actually because our increasing effort in improving the accounts and improving the service on the website, our traffic to the website has been stabilized despite the [stock regression] in Q4 of 2007.

And judging from the increasing registered user accounts of our website, we added about close to 0.9 million registered user accounts of this website in Q4 and this actually is an indicator of increasing interest among retail investors to these two websites, jrj.com and also stockstar.com.

C. Ming Zhao - Susquehanna Financial Group

All right. Thank you.

Operator

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

Analyst for Dick Wei - J.P. Morgan

This is [Himanshu] calling in for Dick Wei. Thanks for taking my question. Just a couple of questions. Firstly, can you comment on the core business trend [business unit] in the first quarter? Because the last quarter, the stock market was quite volatile and yet the company developed. So any comment on what kind of trend you are seeing in the first quarter, specifically in terms of are you seeing registered users increasing in a healthy fashion, cash inflows increasing?

Jeff Wang

Well, after this -- we are happy with our performance in Q1 and actually, the registered user base of the website have been keeping growing steady and we are happy with our cash subscription services, cash subscription fees generated from our retail subscription businesses. But given that in February, which is the Chinese New Year, the traditional Chinese holiday, Q1 from a seasonality perspective is the lowest season in the year. But other than the seasonality issue, we are happy with our performance.

Analyst for Dick Wei - J.P. Morgan

Okay, thank you. And the follow-up just is on your -- on the cost trends of the company. I guess the fourth quarter operating expenses were affected by professional fees and things like that, so on an absolute level, do you expect the costs to now trend down over the next quarter or so, or --

Jeff Wang

I want -- well, first actually talking about costs and you’re talking about fixed costs and the variable costs. Well, in terms of our marketing expenses, while a significant portion, at least 50% are from the commission bonuses paid to telemarketing team and also their management supporting staff, and the fixed variable costs -- as long as we keep growing our top line, we [expect] marketing expense to increase due to the increased commissions and bonuses paid to the telemarketing team.

In addition, we are hiring additional telemarketers to enhance our telemarketing capabilities to also lead to the -- the increase in the [fixed] salaries and compensation out there [inaudible]. And other than that, we may spend some money on marketing expenditures, including for example on our different marketing campaigns, including the China stock competition among retail investors. This kind of activity that is totally very [successful] in acquiring the user base of the website now, to enhance the brand awareness of the website. So in this way, we believe sales and marketing expense will keep growing in line with the growth of our top line.

Talking about general G&A expenses, while we believe actually it will be stabilized at the current level, at least in the first half of 2008.

Analyst for Dick Wei - J.P. Morgan

And just the last question on the headcount additions -- so in the fourth quarter, how many were added in the new call center and how many do you expect to add in [’08]? Basically trying to understand if you can ramp up to 500 seats at the new center by the middle of ’08.

Jeff Wang

We added about 150 telemarketers by the end of 2007 and we are on schedule in terms of expanding to 750 by the middle of 2008. But because it takes time for the telemarketers to get up to speed, so I think the contribution from the telemarketers will start to benefit our business in the second half of 2008.

Analyst for Dick Wei - J.P. Morgan

And just the last question is on the tax rate -- with the new enterprise income tax regulations coming out, what sort of tax rate should we model for 2008?

Jeff Wang

The tax rate of our business will be around 10%.

Analyst for Dick Wei - J.P. Morgan

Okay, sounds good. Okay, thank you so much.

Operator

(Operator Instructions) The next question is from Anindya Chatterjee from Jefferies.

Anindya Chatterjee - Jefferies

Just one more question -- on the trends, is there any disturbing signs of cancellations? I understand that your overall subscriptions went up 24% YOY and that’s very encouraging, despite the volatility in the market. That’s really fantastic but within that, was there actually a larger increase in subscriptions but there were some cancellations which were larger than in YOY terms than the previous quarters?

Jeff Wang

Well, we haven’t seen actually increasing cancellation from our customers. Our cancellation respond rate basically is about 1%, which is similar to the first quarters. And in most of this, that’s actually refund or cancellation due to the technology problems. For example, some people don’t want to use the [business] tools, subscription business tools in their office, for example, due to firewall problems. They may not be able to access our product, so we haven’t seen an increase in cancellations.

Anindya Chatterjee - Jefferies

Okay, thanks. One more question -- on competition, is there any emerging trend as a new threat to your products and to your business line? How is the competitive landscape shaping up? Most people, most investors do think that we need to have a full service capability which should include execution capability, where you would also offer brokering in that. I understand it takes time, as are you negotiating and trying to figure out acquisitions suit you best. It can take a long period of time, you have no idea -- it may take one year, two years, so how -- in the meanwhile, competition will start posing some threat to your revenue stream and growth. What do you think of that?

Jeff Wang

Well, first actually, I mean, you are talking about actually competition in our core business. First, even from actually our own user base of the website, I’m sure we only monetize less than 1% of our registered user base, so the conversion potential is huge that actually we are literally competing against ourselves and not to mention that we are the leading company in this marketplace.

And in addition, our business model is unique -- that is, we -- the success of this business actually requires the [inspiration] of different resources and capabilities, including our telemarketing capabilities, our product development capabilities, and also our data mining capability, not to mention our exclusive access to our leading websites, jrj.com and also stockstar.com. These are the most important distribution channels -- not just distribution channels, the customer acquisition platform and that gives us a competitive advantage to the new entrants in this business.

And in addition to that actually we acquired Genius, which is the leading financial database provider in China, and this also actually creates [entry barriers] to this business. Of course, we do want to expand our service coverages to several customers, to provide full functions of services. But acquisition of Daily Growth from Hong Kong is the first step. Actually, it takes time to work toward this end, to provide a complete platform with not only the flawless execution to deliver better financial products and services to our customers.

Anindya Chatterjee - Jefferies

Thank you, Jeff.

Operator

(Operator Instructions) Thank you, sir. There are no further questions on the phone.

Alice Yung

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, 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 2007 Earnings Call Transcript
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