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China Finance Online Co. (NASDAQ:JRJC)

Q4 2005 Earnings Conference Call

February 13th 2006, 8:00 PM.

Executives:

Jing Wu, Investor Relations Manager

Zhao Zhiwei, Chief Executive Officer

Sam Qian, President, Chief Financial Officer

Analysts:

Youssef Squali, Jefferies & Company

John Bishop, XFN Asia

Jeff Keith, Acorn Global

Operator

Thank you for holding, ladies and gentlemen, and welcome to the China Finance Online Fourth Quarter and Full Year 2005 Financial Results. At this time all participant lines are in a listen-only mode. The presentation will be followed by a question-and-answer session, and instructions will be provided at that time. I would now like to turn the conference over to your host, Ms. Jing Wu from China Finance Online. Please go ahead. Thank you.

Jing Wu, Investor Relations Manager

Thank you, operator. Welcome everyone, to China Finance Online fourth quarter and full year 2005 financial results. Today with me in the conference are Mr. Zhao Zhiwei, our Chief Executive Officer, and Mr. Sam Qian, our President and Chief Financial Officer. After market closed today, the Company issued a press release containing the financial results for the fourth quarter and full year 2005. The purpose of this conference call is to provide the investors with further detailed information regarding these financial results. Following our formal remarks, we’ll be happy to take any questions you might have.

Before we begin, it is my duty to remind you that during today’s conference call, we might make forward-looking statements. This announcement contains forward-looking statements. These statements are made under the Safe Harbor provision of the U.S. Private Securities and Litigation Reform Act of 1995. Statements that are not historical facts, including statements about our beliefs, 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 statements. Potential risks and uncertainties include, but are not limited to, China Financial Online’s historical and possible future losses, limited operating history, uncertain regulatory landscape in the People’s Republic of China, fluctuations in corporate operating results, failing to successfully complete against the new and existing competitors, and the Company’s reliance on China Financial Online’s relationship with Chinese Stock Exchanges and raw data providers. Further information regarding these and other risks is included in China Financial Online’s annual report on form 20-F for the year ended December 31, 2004 and other filings with the Securities and Exchange Commission. China Financial Online does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

Now, I’m going to pass this call to Mr. Zhao Zhiwei, our Chief Executive Officer.

Zhao Zhiwei, Chief Executive Officer

(Foreign Language)

(Translated by another Speaker)

Good morning, and good evening. Thank you for joining us today, China Financial Online’s fourth quarter and full year 2005 conference call. In the year 2005, the Chinese Stock Market is long time weak, which had some impact on our traditional subscription business. However, I’m still glad to see that our net revenue grew by 24% from $6.02 million for the full year 2004 to $7.48 million in our net income, which was $4.62 million for the full year 2005.

Looking back to the year 2005, China Financial Online has been working on enriching our products and in services so to better meet the diversified demands of our customers and to offset the impact from the Chinese stock market. We carried out a comprehensive financial information database plan for targeting the sophisticated institutional investors in early January. A brand new financial service package “Tao of Wealth” was again launched in August, accompanying with the emerging market of personal wealth management in China. We also conducted an online campaign in the second quarter of 2005 to promote our brand name awareness and attract more traffic. In the capital market, we announced towards stock repurchase program, which further expresses the management’s confidence and a positive outlook for the long term value of the Company. Our website, www.jrj.com is currently the most visited and the most influencial financial website in China.

In this new 2006, we will continue to improve further the integral, accuracy and fastness of news and information to better serve our investors and simultaneously boost up our value for online advertising. As part of Company development strategy, we will focus on distribution channel for our financial service package Tao of Wealth in early stage. Our goal is to quickly gain market share through customer acquisitions, such as partnerships with banks, mutual funds and insurance companies. In December 2005, we entered into a strategic cooperation agreement with China Access Management Company Limited, a mutual fund management company in China, CAM. On this agreement, CAM will help distribute few million customized copies of Tao of Wealth to mutual funds investors and subscribers. Based on the federal data system, China Finance Online closed another agreement with Bank of China, according to which they will have to promote Tao of Wealth among their credit card customers.

On our traditional parts, we’re working on the new promotion channels and new package development. Our latest investment in Moloon International Incorporation, a provider of mobile stream media technology and services will be a first try. However, no matter how the market develops, China Finance Online will be always positioning ourselves as a financial information provider, our success in the past gives us the best base on which to be for the future.

At last, I would like to share our great appreciation to our investors, industrialists and partners. We are looking forward to your continued support in the New Year 2006. Now, I will pass the phone to Sam Qian, our President and Chief Financial Officer, to give you more details on our fourth quarter and full year 2005 financial and operating results.

Sam Qian, President, Chief Financial Officer

Thank you, Zhiwei. Good morning for the participants in Asia, and good evening for those in North American. In addition to the highlights of our financial and operational results in today’s earning release, I would like to discuss on several points in detail. Our total net revenue for the fourth quarter was $1.9 million, a decrease of 8% compared to the same period of last year. However if you compare that to the last quarter, this quarter’s revenue actually increased about 5% from $1.81 million. This is mainly due to the continued growth of our advertising related business. Overall, our revenue in year 2005 was $7.48 million, a 24% growth compared to $6.02 million in year 2004.

Our advertising related revenue in the fourth quarter was $789,000, representing 41% of the total net revenue. Compared to the same period in 2004, our advertising revenue increased about 216%. If you compare that to the third quarter of 2005, our Q4 advertising revenue actually increased about 76%. We believe our advertising revenue growth is the result of our continued investment in our marketing and sales business units, as well as the overall growth of Chinese Internet advertising industry. Our advertising revenue in year 2005 was $1.75 million, a 222% increase compared to $544,000 in the whole year 2004.

Our gross margins for the quarter were 92% compared to 94% for the third quarter of 2005. The gross margin for the full year of 2005 was 94% compared to 93% for the full year 2004. Our operating expenses totaled $1.03 million for the quarter, relatively flat compared to $1.01 million in the third quarter of 2005. Total operating expenses in year 2005 was $3.77 million, an increase of 122% from $1.7 million in year 2004. This increase is primarily due to the increases in our general and administrative expenses and sales and marketing expenses. The increase in G&A expense is associated with our becoming a public company in the U.S. The increased sales and marketing expenses is mainly due to our online marketing campaigns started in Q2 of 2005.

Income from operations for the fourth quarter of 2005 were $722,000, an increase of 4% from $693,000 of last quarter, but a decrease of 50% compared to the same period of last year. Our net income for the fourth quarter of 2005 was $1.06 million, a decrease of 16% from $1.27 million for the previous quarter. But, our net income in the third quarter included an FX gain of $327,000 compared to the $37,000 in the fourth quarter. If we exclude the income from the FX gain, our net income in fourth quarter would have increased by 8.5% over the third quarter.

Our number of subscribers and average subscription fee per user has decreased compared to the same period a year ago, because the Stock Market in China is weaker in year 2005 versus 2004. If we compare that to the third quarter of 2005, our number of new subscribers in Q4 decreased, but the number of repeat subscribers increased. Our average subscription fee per new subscriber is relatively flat compared to the third quarter. But, our ASF per repeat subscriber decreased by 23%. We believe that the decrease is primarily attributable to our promotion program in Q4 to encourage our existing subscribers to migrate to more expensive and more comprehensive products.

Next, let’s look to our balance sheet. Our cash and cash equivalent were $46.17 million by the end of year 2005 compared to the $63.34 million by the end of Q3 of 2005. The decrease of our cash and cash equivalents is because A) we repurchased 482,164 shares, ADRs, of our stocks and B) we invested $15 million in Moloon, a leading wireless technology and service provider in China.

Lastly, let me talk a little bit about the RMB revaluation. Since the Chinese Government reevaluated RMB on July 21, RMB has been appreciating gradually against U.S. dollars. However, the impact of RMB revaluation on our financial performance in Q4 is much less than in Q3. We incurred $37,000 income in Q4 because of the FX rate change between U.S. dollar and RMB. Our revenue is denominated in RMB; however, our reporting currency is U.S. dollars. The appreciation of RMB over U.S. dollar will have positive impact on our P&L. The FX change has also affected our balance sheet. Our accounting policies are to translate all assets and liability of our Chinese subsidiaries into U.S. dollars using the purely and exchange rates. Since most of our cash is in RMB, the appreciation of RMB over U.S. dollar we’re bringing again in Q4. This gain will be recorded as equity item on the balance sheet and has no impact on profit and loss accounts. Now, let’s move on to our Q&A session.

Jing Wu, Investor Relations Manager

We’re ready for questions, operator.

Questions-and-Answer Sesssion

Operator

Thank you. The question-and-answer session will now begin. If you wish to ask a question, please press "1" on your telephone keypad now. As a reminder, if you wish to ask a question, please press "1" on your telephone keypad now. The first question comes from Youssef Squali from Jefferies & Company. Please go ahead, sir.

Q - Youssef Squali

Hi. This is Youssef Squali (phonetics) at Jefferies. Just a couple of questions. My first question is about the new subscriber growth. Given that it’s pretty weak this quarter and it has been weak this year. What should we expect for '06?

A - Sam Qian

I have to apology for the quality of the teleconference. I can barely hear you. If I understand you correctly, you say that what’s the Company’s expectation for the subscriber in next year? Right?

Q - Youssef Squali

For the new subscriber, given that it’s been pretty weak, especially for this quarter, what kind of trend should we expect going into '06?

A - Sam Qian

Okay. You are right in a sense that the Chinese Stock Market in 2005 has been overall quite weak, which has negative impacted our subscription services. But, things, the beginning of this year we see some bounce back. But, the Company’s policy is not to forecast any financial results. But, overall, we have, we are confident that we should improve over the past year.

Q - Youssef Squali

Okay. So talking about some kind of a bounce, can you speak more to that, how much of a bounce you’ve seen until now?

A - Sam Qian

The Chinese Stock Market reached eight-year low in the third quarter of last year, and from that, we see the Stock Market has a bounce back of around like 30%.

Q - Youssef Squali

So, is the bounce back in subscriber, a sort of proportionate to that? Is that reasonable?

A - Sam Qian

I should tell you that there is a lag between the financial performance and the Stock Market because of various reasons. A) It usually takes the customers a while to get used to your product, and also the financial market sometimes goes back and forth. So, I think it’s a very complex psychological impact on the customers’ behavior.

Q - Youssef Squali

Okay. I have one more question; actually, just to the ad revenues. Given that this quarter we’ve seen ad revenues almost double, can we take this as a base number for growth going forward? What kind of evolution should we be thinking about ad revenues?

A - Sam Qian

The advertising business in China has been growing over the past few years. But, I cannot give you exact guidelines with regard to the growth rate of, however it was, all I can tell you is that according to some U.S. analysts, they believe that Chinese online advertising market should grow at about 30% growth rate over the next few years. But, the Company could be different from the others. We have been investing and will continue to invest in this booming sector of the Internet industry.

Q - Youssef Squali

So, something in the ball park of 30% may be reasonable. Is that expected to go back?

A - Sam Qian

That’s the forecast of many of the U.S. analysts for the industry. Of course, we will try to perform at least together with the industry.

Q - Youssef Squali

Okay. And, regarding the acquisition of Moloon, can you speak a little bit on mechanics, synergies that you expect from that.

A - Sam Qian

Moloon is a very fast growing wireless technology and service provider in China. We made an investment in this company in the end of last year because of the synergies we have together. What we aim at is to (a) line up together with Moloon to provide wireless financial information services to the 400 million Chinese mobile phone users and wireless service users. This is a new sector and a new distribution channel that we have not touched in the past. We expect some growth from here. But, since this is a new area, we cannot give very reliable forecast.

Q - Youssef Squali

That’s all. Thank you very much.

Operator

Just a reminder, if you wish to ask a question, please press "1" on your telephone keypad now. The next question comes from John Bishop from XFN Asia. Please go ahead, sir.

Q - John Bishop

Hello. I was wondering if you could provide some details about your deal with the Bank of China, particularly any financial details and any expectations you have for how this will boost sales of your product. Thank you.

A - Sam Qian

Okay. I’d like to pass that to our Chief Executive Officer, Zhiwei.

A - Zhao Zhiwei

(Foreign Language)

(Translated by another Speaker)

This contract is between Bank of China and China Finance Online. The goal of this cooperation is to promote and distribute our Tao of Wealth among the Bank of China credit card users nationwide. This is a new distribution channel for the Company. Our strategy is to penetrate quickly into this new market. Thank you.

Operator

As a reminder, if you wish to ask a question, please press "1" on your telephone keypad now. The next question comes from Jeff Keith (phonetics) from Acorn Global. Please go ahead, sir.

Q - Jeff Keith

Yes. A couple of questions. The first question is, I have been following the stock for a long time, and almost every quarter, I just do the PR all on the conference calls. The Company has been blaming its disappointing performance on the Chinese Stock Market. However, if we look at Chinese Stock Market, as you just mentioned, the Shanghai domestic market clearly bottomed out in mid last year. But, if we look at the new subscriber numbers, the fourth quarter new subscriber number is suddenly half of the third quarter. So, can we sit back and really think about if the Company’s performance really correlated with the China Stock Market, or if there’s something else going on? If there’s something more fundamentally wrong or end users may not think your product is adding value or lots of information already free online or another way of thinking that the Chinese market is very saturated in people probably less rely upon the information, so they probably order and rely more on the fundamental reasons.

A - Sam Qian

Okay. It’s a very long question. Let me just spend some time to translate it to our CEO. Just hold on. Okay. Just hold on. Our CEO will answer your question.

A - Zhao Zhiwei

(Foreign Language)

(Translated by another Speaker)

We observed that as well, the Chinese Stock Market bottoming out in the third quarter and it bounced back since then. But, overall, the Stock Market still volatile. But, we believe the decision making of the individual investor lags the financial market. We are also constantly searching for the new demands from the individual investors, and that’s why this year we launched many, many new products and new services.

Q - Jeff Keith

Thank you. I have a follow-up question on that about Company’s general strategy. The Company has been moving around. First they tried to provide the financial service and the listing company information, and now if we look at a different quarter, the number is more than 40% of the revenue comes from advertising. Advertising is entering a very competitive space. Also, the Company announced that they are buying-- they are paying $15 million for Moloon. So, as an investor, could you give more clear picture? What is the exact strategy for the Company to move forward? It’s kind of like trial and error to the investors by now, to be honest.

A - Sam Qian

Okay.

A - Zhao Zhiwei

(Foreign Language)

(Translated by another Speaker)

The Company’s strategy is very clear; i.e., we provide financial information services to the investors. The growth of the advertising is a byproduct of our, you know, that is the focus on improving the quality of financial information services to the investors, especially on the website. Investing in Moloon just reflects the Company’s view that the wireless service sector is a very big potential market for the financial information services. It has been proven that the wireless services in China is quite big. This is a new distribution channel that we are yet to explore. That’s the strategy we have decided.

Q - Jeff Keith

Thank you.

Operator

Just a reminder, if you wish to ask a question, please press “1” on your telephone keypad now. Ms. Wu, there are currently no further questions.

Jing Wu, Investor Relations Manager

That’s all for today’s conference. If you still have further questions, our IR staff, including myself, can be reached at 86.10.6621.0425, and our e-mail address is ir@jrj.com. Ladies and gentlemen, thank you again for joining us today. Bye-bye.

Operator

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

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