China Finance Online Co. Limited (NASDAQ:JRJC) Q2 2018 Results Earnings Conference Call September 13, 2018 8:00 PM ET
Dixon Chen - IR
Zhiwei Zhao - Chairman and CEO
Lin Yang - Vice President
Julie Zhu - Director of Investor Relations
Ladies and gentlemen, thank you for standing by, and welcome to the China Finance Online Report Second Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] I must advise you that this call is being recorded today, Friday,14th of September 2018.
I would now like to hand the conference over to your first speaker today, Mr. Dixon Chen. Thank you. And please go ahead.
Thank you. Thank you, operator. Welcome to China Finance Online's 2018 second quarter and first six months financial results conference call. With us today are Mr. Zhiwei Zhao, Chairman and CEO; Mr. Lin Yang, Vice President; and Ms. Julie Zhu, Director of Investor Relations.
Mr. Zhao will provide a summary of business dynamics in the quarter, and then Mr. Yang will review the quarterly financial results. Thereafter, the management will hold a Q&A session. We will provide translation during the Q&A.
Before we begin, I'll remind all listeners that throughout this call, we may present statements that may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. The words belief, estimates, plans, expect, anticipate, projects, targets, optimistic, intend, aim, future, will or similar expressions are intended to identify forward-looking statements. All statements other than historical facts may be deemed forward-looking statements. These forward-looking statements are based on current expectations or beliefs, including, but not limited to, statements concerning China Finance Online's operations, financial performance and condition.
China Finance Online cautions that these statements by their nature involve risks and uncertainties, and actual results may differ materially depending on a variety of important factors, including those discussed in China Finance Online's reports filed with the Securities & Exchange Commission from time to time. China Finance Online specifically disclaims any obligation to update the forward-looking statements in the future.
At this time, I would now like to turn the conference call to Mr. Zhao.
[Foreign Language] Good morning and good evening. Thank you for joining us for today’s conference call. [Foreign Language] During the second quarter of 2018 our revenue were up year-over-year, while our cost were down and our bottom line losses continue to narrow. Under the weak market conditions, we continue to reduce cost and improve efficiency.
The Chinese stock markets suffered a crushing sell-off during the second quarter of 2018 and the Shanghai Index plunged from around 3200 to 2800. However, the traffic to our flagship website, JRJ.com.cn, bucked this market trend and rose to number of 430 in Alexa's Global Ranking and number 62 in China. We remain one of the most trusted financial news hubs with our proprietary content, fact-based journalism, breaking news coverage and analysis on market trends.
We continue concentrating on expanding our fintech capabilities as we further develop and optimize our intelligent finance products, which enable investors to identify investment opportunities and discover value stocks.
As the Shanghai Index sank to a new three-year low, many value-driven institutional investors began entering into the market. We believe our cloud-based investment research platform, Genius Zhisheng, is well positioned to assist portfolio managers to navigate through the massive industry data and corporate historical financial data to enable them to back-test their investment strategies in a speedy fashion. We have a large number of beta-test programs in place with leading brokerage firms and wealth management advisors."
Based on our core intelligent asset allocation technology, we introduced Lingxi Robo-advisor at the end of 2016. Since its inception Lingxi has being outperforming the market for investment returns with a lower drawdown.
In the second quarter of 2018, the Chinese stock market experienced one of the largest sell-offs, pushing the quarterly loss of Shanghai Composite Index to 10.1% and year-to-date loss to 13.9%. However, Lingxi Robo-Advisor posted an average loss of 0.5% in the second quarter of 2018 and an average return of 0.7% gain in the first six months of 2018, with an average drawdown rate of 2.1% in the second quarter of 2018 and 4.6% in the first six months of 2018, respectively. These results significantly outperformed the Shanghai Composite Index for investment return with a substantially lower drawdown.
According to our internal research, Lingxi's performance in the first six months of 2018 also exceeded most of its peer products in the market with its better return and lower drawdown. In the second quarter of 2018, one of the best-performing strategies by Lingxi produced an annualized return of 6%.
Lingxi Platinum Product, catering for mass affluent investors in China, outperformed the average level of public fund- of-funds for investment return with lower drawdown. During the second quarter, Shanghai-Shenzhen 300 Index suffered a 9.9% loss, while Lingxi Platinum Product core strategy was only down 1.4%. Lingxi Platinum Product alleviated the broad market sell-off impact to its clients and demonstrated its resilience and efficiency of the multiple strategy global asset allocation program.
As Lingxi Robo-advisor continues to outperform the benchmark index, as well as - its peer products in the marketplace, our superior track records drew attention from institutions looking for solutions to enrich their services to their clients.
Recently we entered into a partnership with the world leading Enterprise Service provider YonYou Network Technology for corporate intelligent asset allocation. August 18th, 2018, we launched the first financial product Enterprise Xianjin Bao, on YonYou Financial Cloud platform, aiming to manage enterprises' liquid assets to produce steady returns.
On such platform, we will provide our intelligent corporate cash management solutions to over 4 million corporate customers and other organization customers of YonYou. Built upon our extensive research of comprehensive fund performances and intelligent asset allocation, this cash management product will help YonYou's customers to maximize the efficiency of their funds.
The recently formed partnership on corporate intelligent asset allocation with YonYou not only demonstrated YonYou's recognition of our fintech capability, but also opens doors for our cloud-based Software-as-a-Service to penetrate the large corporate wealth management market in China.
With that, I will now turn the call to our Vice President, Lin Yang to go over financial details for the quarter. Thank you.
Thank you. Let me walk through our major items for the second quarter. Please note that all financial numbers are unaudited and are presented in U.S. dollars rounded to 1 decimal point for approximation.
Net revenues were $12.9 million, compared with $9.6 million during the second quarter of 2017 and $13.3 million during the first quarter of 2018. During the second quarter of 2018, revenues from financial services, the financial information and advisory business, and advertising services contributed 46%, 44% and 9% of the net revenues, respectively, compared with 67% [ph], 20% and 10%, respectively, for the corresponding period in 2017.
Revenues from financial service were US$6 million, compared with US$6.4 million during the second quarter of 2017 and US$6.7 million during the first quarter of 2018 [ph].
Revenues from financial services consist mainly of equity brokerage services. The equity brokerage business grew 21.8% year-over-year. The year-over-year decrease in revenues from financial services was mainly due to a decline in revenues from the company's commodities brokerage services after the suspension of new commodities trading by the precious metal exchange in China in 2017. Revenues from the commodities brokerage were US$1.6 million, or 17% of total revenues, in the second quarter of 2017.
Revenues from the financial information and advisory business were $5.7 million, an increase of 187.5% from US$2 million during the second quarter of 2017 and an increase of 15.5% from US$4.9 million in the first quarter of 2018.
Revenues from the financial information and advisory business were mainly comprised of subscription services from individual and institutional customers. During the second quarter, subscription revenues from individual customers grew by 1774.6% year-over-year and 62.7% quarter-over-quarter, driven by the increased subscription of the Company's cloud-based analytical tools.
The year-over-year and quarter-over-quarter increases of revenues from the financial information and advisory business were mainly due to an increase in subscription revenues from individual customers.
Revenues from advertising services were US$1.2 million, compared with US$0.9 million in the second quarter of 2017 and US$1.7 million in the first quarter of 2018. The increased traffic to our site and readership recognition from of our premium content helped to elevate our advertising revenues on a year-over-year basis.
Gross profit was US$8.5 million, compared with US$5.1 million in the second quarter of 2017 and US$8.2 million in the first quarter of 2018. Gross margin in the second quarter of 2018 was 65.5%, compared with 52.9% in the second quarter of 2017 and 61.9% in the first quarter of 2018.
The year-over-year and quarter-over-quarter increases in gross margin were mainly due to revenue mix changes associated with the growth of the financial information and advisory business, which carries a higher margin.
General and administrative expenses were US$3 million, a decrease of 22.3% from US$3.9 million in the second quarter of 2017, and a decrease of 7.7% from US$3.3 million in the first quarter of 2018.
The year-over-year decrease was mainly due to the suspended operations of the commodities brokerage services, and the quarter-over-quarter decrease was mainly attributable to more stringent expense control measures and streamlined operations.
Sales and marketing expenses were US$6.6 million, a decrease of 10.2% from US$7.3 million in the second quarter of 2017, and an increase of 5.5% from US$6.2 million in the first quarter of 2018. The year-over-year decrease was mainly attributable to the reduction in headcount and rental expenses associated with the terminated commodity brokerage operation.
Research and development expenses were US$3.8 million, a decrease of 11.5% from US$4.3 million in the second quarter of 2017 and with no significant difference from US$3.8 million in the first quarter of 2018.
The year-over-year decrease was mainly attributable to improved efficiency after the consolidation of the R&D team. The Company continues to maintain a team of senior software engineers, data scientists and capital market professionals to support further development in its fintech capabilities.
Total operating expenses were US$13.4 million, a decrease of 15.2% from US$15.7 million in the second quarter of 2017, and no significant difference from US$13.3 million in the first quarter of 2018. The year-over-year decrease was mainly due to improved operation efficiency and effective cost controls.
Loss from operations was US$4.9 million, compared with a loss from operations of US$10.7 million in the second quarter of 2017 and a loss from operations of US$5 million in the first quarter of 2018.
Net loss attributable to China Finance Online was US$4.3 million, compared with a net loss of US$8.3 million in the second quarter of 2017 and a net loss of US$5.2 million in the first quarter of 2018.
Fully diluted loss per American Depository Shares attributable to China Finance Online was US$0.19 for the second quarter of 2018, compared with fully diluted loss per ADS of US$0.37 for the second quarter of 2017 and fully diluted loss per ADS of US$0.23 for the first quarter of 2018.
Basic and diluted weighted average numbers of ADSs for the second quarter of 2018 were 22.8 million, compared with basic and diluted weighted average number of ADSs of 22.7 million for the second quarter of 2017. Each ADS represents five ordinary shares of the Company.
Now let me walk you through the first six months of 2018 financial results. Net revenues for the first six months of 2018 were US$26.2 million, an increase of 43.3% compared with US$18.3 million in the first six months of 2017.
Gross profit for the first six months of 2018 was US$16.7 million, an increase of 83.2% compared with US$9.1 million in the first six months of 2017.
Net loss attributable to China Finance Online for the first six months of 2018 was US$9.5 million, compared to a net loss of US$19.9 million in the first six months of 2017.
Fully diluted loss per ADS attributable to China Finance Online was US$0.42 for the first six months of 2018, compared with fully diluted loss of US$0.88 for the first six months of 2017.
As of June 30, 2018, total cash and cash equivalents, restricted cash and short-term investments were US$17 million. Total shareholders' equity of China Finance Online was US$45.4 million as of June 30, 2018.
With that, this wraps up my prepared summary. And operator, we are ready for questions.
Thank you. [Operator Instructions] The first question comes from the line of Bob Wilson. Your line is now open.
Thank you. It's encouraging to see the subscriptions for retail investors growing, can you elaborate a bit more why its growing so fast and whether this type of growth is sustainable for the coming quarters?
Based on our fintech capability, we developed smart stock picking tools and quant [ph] trading strategies to enable our user to better identify trading opportunities, our individual stocks.
Also we provide a highly personalized algorithm based upon the risk tolerance and investment styles. As you know, as the market become more volatile, retail investors are seeking for assistance in their decision making. We believe this trend will continue.
Although the Chinese stock market index has not been performing very well recently, China is still a major market with over 140 million retail individual investors and over 3500 public listed companies, many of which are still producing solid growth. We believe that our services are well positioned for value creation.
Thank you. On the Institutional Subscription business, I know you’re doing a bunch of testing with broker dealers and financial advisors. What is holding them up from signing and what kind of competing products are you seeing in the marketplace right now?
You are correct that many broker dealers or brokerage firms and advisors are running [indiscernible] uphold products. From their initial feedback we have received very favorable recognition for our innovation to leverage fintech to improve their service quality and efficiency. However, their decision process out of these - these are large institutions. Their decision process is very long, but we believe we are getting close.
In terms of competition, there are always competition in China for any industry. However our competitors do not provide a complete platform like ours. With our robust computing power, our investment research platform significantly raise efficiency for analysts and portfolio managers.
To give you an example, as we are cloud based, it only takes seconds on our platform to back - to back test past a very complex investment strategy, past 10 years with historical record in comparison of - in comparison with ours, our other competitors systems.
All right. Thank you for your answer.
Thank you. [Operator Instructions] The next question is from Pat Murphy. Your line is now open.
Hi. With the tanking [ph] stock market over there, do you see Chinese investors to cut the losses or adding position? Do you see investors rotating out of equity market to move their money to fixed income products?
In China the stock market is still the most prevailing destination for investments and there are over 140 million retail individual investors in the market. 2018 is a transition year for Chinese stock market towards value investing.
With the Chinese economy moving towards consumption oriented economy, the earning power of many corporations or many companies is going to be more resilient. Considering the current low bad [ph] ratio of the stock market in the long run equity investment will produce good performance. Therefore combining future earning power and current valuation, the Chinese stock market at this point is a good place for asset allocation.
We see more value-driven investors are building. Value investors are long-term oriented. They tend to study more on the fundamentals. This presents an opportunity for us to sell our subscription services for them to come out to our platform which is a comprehensive platform enable them to do all kinds of research - all levels of research and improve their efficiency.
Envision in today's market condition on one hand investors are working on capturing long-term investment opportunities or identifying long-term investment opportunities. And on the other hand they are also looking for better diversification for their asset allocation.
So our Lingxi Robo-Advisor is here to provide retail individual investors with all personalized global asset allocation through mutual fund offerings. For example in the first half of the year Shanghai Composite Index fell by 13.9%, while our Lingxi achieved 0.7% positive return. Also during the second quarter Lingxi’s best strategy produced a annualize return of 6%. So all these are pretty positive.
Thank you. [Operator Instructions] We have a follow up question from Pat Murphy. Your line is now open. Please ask.
This partnership with Chinese corporate software company is interesting. In the U.S. we have ADP for large corporations and Quicken [ph] for SME us. They're building some interesting new financial services. Can you tell us more about your partnership and what your partnership entails, especially on how you plan to monetize it? Thanks.
Thank you. It's a good question. It's certainly an important breakthrough for us, this partnership with YonYou which was announced. As we all know corporates are a vital part of the economy. Many of them are under serviced. YonYou is the largest corporate software provider in China with over 4 million corporations and small and medium enterprises clients.
Initially we will collaborate in the area of corporate cash management solutions by providing superior algorithms and research platform to enable YonYou customers to construct portfolios of high quality money market funds to meet their cost and vital [ph] needs. Later on we can explore areas of such as pension investment or others.
Corporate financial services are very large and unmet – have very large unmet demand in China. There are many ways to monetize it. So I will recommend you to stay tuned as we will make announcement in the future.
[Operator Instructions] Now we reached the end of the Q&A session. I would now like to hand the conference back today’s presenter, please continue.
Thank you, everyone for attending. China Finance Online 2018 second quarter earnings conference call. We look forward to speaking with you.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. And you may all disconnect.