China Finance Online Co. Ltd (NASDAQ:JRJC) Q3 2018 Earnings Conference Call November 28, 2018 8:00 PM ET
Dixon Chen - Investor Relations
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 Reports Q3 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. There’ll be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 29th of November 2018.
I would now like to hand the conference over to your first speaker today, Mr. Dixon Chen. Thank you. Please go ahead.
Thank you, operator. Welcome to China Finance Online's 2018 third quarter and first nine months financial results earnings 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 translations 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 turn the conference call over to Mr. Zhao.
Good morning and good evening. Thank you for joining us for today’s call. Under the continuing weak stock market conditions, our third quarter net revenue were lower quarter-over-quarter. However our gross margin improved year-over-year and our bottom line loss continued to narrow on the year-over-year basis. With the priority of maintaining future growth potential we continue to control costs and improve efficiency. In the third quarter of 2018 the Chinese stock market experienced another round of sell offs, pushing the quarterly loss of Shanghai Composites Index to 0.9%, and year-over-year loss to 14.7%.
However our Robo-Advisor product, Lingxi weathered the storm of a typical market and continued to outperform the market indexes and its peer Robo-Advisor products in the market place. Lingxi posted an average gain of 1.4% in the third quarter of 2018 and average of 2.9% in the first nine months of 2018 with an average draw down rate of 2.1% in the third quarter of 2018 and 4.4% in the first nine months of 2018 respectively. According to China Finance Online’s internal research in the third quarter of 2018, one of the best performing strategies by Lingxi produced an annualized return of 11%.
Our flagship website, jrj.com.cn continued to heighten its market inference with its Alexa’s global ranking and China ranking reaching number 383 and number 56 respectively, in an ongoing environment of sluggish stock market performance we have been maintaining our dedicated services of providing professional and timely market news, and high quality content and also striving to provide -- explore ways to monetize our news bits.
We’re pleased that the value of Rifa Financial is gradually recognized by the market; we recently we entered into a share transfer agreement with a strategic investor; upon signing this strategic investor joins our shareholder base at a valuation of HK$369 million, based on HK$73.8 million about US$9.4 million in exchange for a 20% equity transfer, through this strategic partnerships we hope to further unlock the potential of our companies overseas wealth management business.
Starting November 21, 2018 China Unicom officially enlisted China Finance Online’s Lingxi Robo-Advisor, its flagship payment app, EPay, users of China Unicom EPay mobile app would have access to the one-stop wealth management services of the global asset allocation provided by China Finance Online’s Lingxi Robo-Advisor, as one of the big three telecom operators in China, China Unicom has 216 million 4G mobile subscribers and a total of 312 million mobile users.
Our newly formed partnership with China Unicom demonstrated the market recognition of our asset allocation capabilities. We remain confident that we are able to provide vast number of retail investors with the best-in class wealth management experience. In addition, we have gradually penetrated the Chinese financial institution market with our core fintech powered intelligent financial products; in the future we will continue to develop our fintech capabilities, optimize and upgrade our service and product offerings, open new markets, and enable our investor clients to identify investment opportunities and capture value in a changing market environment.
With that I’ll turn the call to our Vice President, Lin Yang to go over our financial details for the quarter. Thank you.
Thank you, Mr. Zhao. Let me walk you through our major items for the third 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 US$8.6 million compared with US$10.7 million during the third quarter of 2017 and $12.9 million during the second quarter of 2018. During the third quarter of 2018, the revenues from financial services, the financial information and advisory business and advertising services, contributed 55%, 27%, and 17% of the net revenue respectively compared with 70%, 24% and 5% respectively for the corresponding period in 2017.
Revenues from financial services were $4.7 million, compared with $7.5 million during the third quarter of 2017 and $6 million during the second quarter of 2017 -- 2018. Revenues from financial services consist mainly of equity brokerage services. The year-over-year decrease of revenues from financial services was mainly due to the suspension of commodities brokerage business as well as reduced revenue from the equity brokerage business. The quarter-over-quarter decrease of revenues from financial services was mainly due to a decline in revenues from the equity brokerage business.
Revenues from the financial information and advisory business were $2.4 million, compared with $2.6 million during the third quarter of 2017 and $5.7 million in the second quarter of 2018. Revenues from the financial information and advisory business were mainly comprised of subscription services from individual and institutional customers. During the third quarter, subscription revenue from individual customers grew by 520.4% year-over-year, driven by the increased subscription of the Company's cloud-based analytical tools. The year-over-year revenue decrease in the financial information and advisory business was mainly due to the weaker performance of the Chinese stock markets affecting our financial advisory business. The quarter-over-quarter decrease in the financial information and advisory business was mainly due to the decrease of revenues from individual subscription services.
Revenues from advertising services were $1.4 million, compared with $0.6 million in the third quarter of 2017 and $1.2 million in the second quarter of 2018. The readership recognition of our premium content helped to elevate our advertising revenues on both year-over-year and quarter-over-quarter basis. Gross profit was $5 million, compared with $4.8 million in the third quarter of 2017 and $8.5 million in the second quarter of 2018. Gross margin in the third quarter of 2018 was 58.2%, compared with 44.9% in the third quarter of 2017 and 65.5% in the second quarter of 2018. The year-over-year increase in gross margin was mainly due to the year-over-year increase of revenues from individual subscription services, which carry a higher margin. The quarter-over-quarter decrease in gross margin was mainly due to the quarter-over-quarter decrease of revenues from individual subscription services.
General and administrative expenses were US$3.1 million, a decrease of 4.9% from US$3.2 million in the third quarter of 2017 and an increase of 2.0% from US$3 million in the second quarter of 2018. The year-over-year decrease was mainly due to improved efficiency. Sales and marketing expenses were US$4.8 million, a decrease of 31% from US$6.9 million in the third quarter of 2017, and a decrease of 27.2% from US$6.6 million in the second quarter of 2018. The year-over-year decreases were mainly attributable to the reduction in expenses associated with the terminated commodity brokerage operation and reduced commissions associated with lower activity in the equity brokerage business. The quarter-over-quarter decreases were mainly attributable to the reduced commissions associated with lower activity in the equity brokerage business.
Research and development expenses were US$3.5 million, a decrease of 9.5% from US$3.8 million in the third quarter of 2017 and a decrease of 7.9% from US$3.8 million in the second quarter of 2018. The year-over-year and quarter-over-quarter decreases were 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$11.3 million, a decrease of 19.1% from US$14 million in the third quarter of 2017, and a decrease of 15.2% from US$13.4 million in the second quarter of 2018. The year-over-year and quarter-over-quarter decreases were mainly due to lower activity in the equity brokerage business, improved operational efficiency and effective cost controls.
Loss from operations was US$6.3 million, compared with a loss from operations of US$9.2 million in the third quarter of 2017, and a loss from operations of US$4.9 million in the second quarter of 2018. Net loss attributable to China Finance Online was US$6 million, compared with a net loss of US$8.5 million in the third quarter of 2017, and a net loss of US$4.3 million in the second quarter of 2018. Fully diluted loss per ADS attributable to China Finance Online was US$0.26 for the third quarter of 2018, compared with fully diluted loss per ADS of US$0.37 for the third quarter of 2017. Basic and diluted weighted average numbers of ADSs for the third quarter of 2018 were 22.8 million, compared with basic and diluted weighted average number of ADSs of 22.7 million for the third quarter of 2017. Each ADS represents five ordinary shares of the Company.
Now let me walk us through the first nine months of 2018 financial results; net revenues for the first nine months of 2018 were US$34.8 million, an increase of 20% compared with US$29 million in the first nine months of 2017. Gross profit for the first nine months of 2018 was US$21.7 million, an increase of 55.8% compared with US$13.9 million in the first nine months of 2017. Net loss attributable to China Finance Online for the first nine months of 2018 was US$15.5 million, compared to a net loss of US$28.4 million in the first nine months of 2017. Fully diluted loss per ADS attributable to China Finance Online was US$0.68 for the first nine months of 2018, compared with fully diluted loss of US$1.25 for the first nine months of 2017. Total shareholders' equity of China Finance Online was US$39.6 million as of September 30, 2018.
With that this wraps up my prepared summary. And operator, we are ready for questions.
Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Pat Murphy. Please ask your question. Mr. Murphy your line is now open, please ask your question.
Looks like the Chinese stock market has been very weak this year, but your Robo-Advisor managed to generate a positive return, what kind of combination does it -- to achieve such a performance?
Unidentified Company Representative
Lingxi Robo-Advisor features our cutting edge fintech along with AI to provide investors with customized wealth management services and high quality, high efficient -- highly efficient intelligent financial asset allocation.
Based upon our knowledge of global market trends, and asset allocation algorithm, Lingxi Robo-Advisor excels in the test of this difficult market and continue to outperform the market indexes. And the majority of its peer products in the marketplace. Because of its outstanding performance in both return and the risk control, Lingxi, our Robo-Advisor is increasingly receiving more recognition from large institutions. After our partnership with enterprise software giant YonYou which we announced a few months ago, and we recently inked a strategic partnership with China Unicom, intelligent asset location. As we mentioned in our earnings press release, Lingxi has been enlisted by China Unicom, its flagship mobile app EPay. Now the users of China Unicom can log in their EPay account, and turning to EPay wealth management section and experience the professional wealth management service, covered by Lingxi Robo-Advisor.
[Operator Instructions] Your next question comes from the line of Bob Wilson. Please ask your question.
While reviewing the quarter, your revenue is down and your loss has increased from last quarter as well, in such a market filled with uncertainties what would you do to prepare yourself for the challenges?
Unidentified Company Representative
In the third quarter the Chinese stock market remained sluggish, and uncertainty increased, our revenue declined from a quarter ago as a result of that, and on hand we’re consolidating high quality resources, strengthen our fintech core competence, promoting our products in the marketplace and increasing our earnings power; on the other hand, we’ve been streamlining our internal resources and increasing overall operational efficiencies.
Your next question comes from the line of Pat Murphy. Please ask your question.
You’re rating on Alexa has been on a rise quarter-after-quarter, a three part question, what you’ve done to get there, is that sustainable and what’s your plan to turn the growing traffic to your site in revenue?
Unidentified Company Representative
The rising recognitions of website is mainly attributable to our professional news and content development. We’ve amassed high quality resources along with hot topics of market economics, updates, and policy dynamics to provide fast investor audience with deep sized economic analysis and about investment philosophies, and more and more news aggregators platforms are using our content or republishing our reports. In addition with our professional platforms and large inference in the market the China Finance Online has successfully hosted high caliber conferences such as 2018 Summer World Economic Forum Night, and Industry Transition and Reform forums and 2018 Chinese Public Listed Companies Innovation Summit, through these conferences, we help investor to restore confidence in the challenging market environment, identified -- also identify value and investing opportunities as embraced more in new innovations. And we utilize our core competence and track record in news and data analysis to introduce Chinese A share headline news, smart research reports, and other paid products. These products not only enable our customers and clients to better understand the market, but also enable us to monetize through innovation and generate revenue for us as well.
There’re no further questions at this time. I would now like to hand the conference back to today’s presenter. Please continue.
Unidentified Company Representative
Thank you everybody for attending China Finance Online third quarter 2018 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, you may now all disconnect.