China Finance Online Co. Limited (NASDAQ:JRJC) Q4 2018 Earnings Conference Call April 23, 2019 8:00 PM ET
Dixon Chen – Investor Relations
Zhiwei Zhao – Chairman and Chief Executive Officer
Lin Yang – Vice President
Conference Call Participants
Bob Wilson – Analyst
Pat Murphy – Analyst
Ladies and gentlemen, thank you for standing by, and welcome to China Finance Online Reports Fourth Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advice you that this conference is being recorded today April 24, 2019.
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 fourth quarter and full year 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 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. Our top line further improved from the third quarter while our net loss was narrowed. Through the efforts of controlling cost and improving efficiency, for 2018, our net revenue increased year-over-year and our bottom line losses were reduced by $16.8 million. With the priority of strengthening future growth potential, we will continue to improve efficiency.
[Foreign Language] While the stock market suffered major losses in China and Hong Kong during the fourth quarter, our equity-brokerage related business maintains a strong growth momentum and our intelligent-finance driven fintech business continued to lock in contracts with leading brokerage firms in China. We are pleased that we have established strategic partnerships with influential financial institutions in China and are developing systems to empower their wealth management businesses.
[Foreign Language] Entering into 2019, we recently won multiple contracts from leading brokerage firms in China. In January 2019, we announced that we have entered into a contract was Orient Securities, a top ten leading brokerage firm in China according to the Securities Association of China, to construct an intelligent, contextual, pragmatic online nationwide investor education center to equip Orient Securities with industry-leading comprehensive intelligent solution for investor education. In addition to Orient Securities, we have also entered into contracts with other leading brokerage firms such as BOCI, which is Bank of China International, and Southwest Securities to develop smart and customized solutions for investor education.
[Foreign Language] We also signed a strategic partnership agreement with Founder CIFCO Futures, a leading futures brokerage firm in China. Pursuant to the partnership agreement, both parties will collaborate in the development of more advanced trading system, smart market news alert, cloud-based research platform and industry forums.
[Foreign Language] The changing market environment is posting more challenges to financial advisors. In late 2018, we launched the i-TAMP platform, which stands for Turnkey Asset Management Platform, to provide financial advisors consultation and advice on stocks, mutual funds, wealth management products, insurance, trust and other financial products. Featuring best-in-class TAMP, this platform has already attracted hundreds of financial advisors to open their online offices to provide services to mass retail investors. The key benefits of the i-TAMP platform are the superior user experience and robust product functionalities, which empower financial advisors to better serve their clients.
[Foreign Language] According to our proprietary asset allocation system, our Robo-Advisor product, Lingxi, provides Chinese retail investors with a wide array of investment combinations and strategies and personalized global asset allocations through Chinese domestic mutual funds.
Since its inception, Lingxi significantly outperformed all Chinese market key indexes and most of the peer products in the Chinese marketplace. In 2018, the Shanghai Composite Index experienced a loss of 24.6%. However, 95% of the strategies in our Robo-Advisor product, Lingxi, posted positive returns, with a defensive strategy yielding an annual return of 5.28% in 2018. Since its inception in 2017 to the end of 2018, the accumulative returns of our Lingxi's high-risk, medium-risk and low-risk strategies were 16.94%, 13.91% and 19.79%, respectively.
[Foreign Language] Our other operations have also been making solid progress. Our website, JRJ.com.cn, remains a popular destination for news and analysis on the economy and capital markets, and its unique visitors all year in 2018 rose to 253 million from 236 million in 2017 and 169 million in 2016. The strong growth of traffic to our site was attributable to the improvement of our fact-based journalism, breaking news coverage and proprietary deep dive content.
[Foreign Language] Being one of the largest online financial media, we take pride in our original content development as the number two most popular financial news website in China by Sina, the Company – our 253 million unique visitors in 2018 along with a robust presence in large Chinese social media domains including 2.7 million followers on Weibo, 1 million followers on Wechat, and 1.8 million followers on TikTok. In recent months, the Company has been consistently ranked number one on Baidu's financial institutions value board for its 500,000 followers and accumulative reads of 410 million.
[Foreign Language] In 2018, our media content department received a slew of awards and letters of appreciation from China Banking Association, China Banking Regulatory Commission, and Securities Investment Association and National Internet Finance Association of China for our outstanding media coverage on Chinese banking industry and stock markets. These accolades are government endorsements of our efforts in promoting rational and long-term investment philosophy.
[Foreign Language] Also in December 2018, we successfully hosted the 2018 Fintech Forum and Leading China Annual Awards in Beijing. The key discussions were centered around artificial intelligence, data security, big data, risk management, Internet-of-Things and blockchain. This conference is committed to promoting long-term health of the financial industry in China and has received high recognitions from financial regulators and institutions.
[Foreign Language] With that I will now turn the call to our Vice President, Lin Yang, to go over the financial details for the quarter and the full year results. Thank you.
Thank you, Mr. Zhao. Let me walk you through our major items for the fourth quarter. Please note that all financial numbers are unaudited and are presented in U.S. dollars rounded to one decimal point for approximation. Net revenues were US$10.7 million compared with US$13.6 million during the fourth quarter of 2017 and US$8.6 million during the third quarter of 2018. During the fourth quarter of 2018, revenues from financial services, the financial information and the advisory business and advertising services contributed 53%, 19% and 28% of the net revenue, respectively, compared with 56%, 21% and 12%, respectively, for the corresponding period in 2017.
Revenues from financial services were US$5.7 million compared with US$8.9 million during the fourth quarter of 2017 and US$4.7 million during the third quarter of 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 reduced revenues from the equity brokerage business. The quarter-over-quarter increase was mainly driven by the strengthening of Rifa's equity brokerage business.
Revenues from the financial information and advisory business were US$2 million, compared with US$2.9 million during the fourth quarter of 2017 and US$2.4 million in the third quarter of 2018. Revenues from financial information and advisory business were comprised of subscription services from individual and institutional customers and the financial advisory service. During the fourth quarter, subscription revenue from individual investors decreased by 12.3% year-over-year, mainly due to the effects of streamlining sales team and upgrading business operation for long-term healthy growth during the fourth quarter.
Revenues from advertising services were US$3 million, compared with US$1.6 million in the fourth quarter of 2017 and US$1.4 million in the third quarter of 2018. The increased traffic to our site also helped elevate our advertising revenues on both a year-over-year and quarter-over-quarter basis.
Gross profit was US$6.9 million, compared with US$6.8 million in the fourth quarter of 2017 and US$5 million in the third quarter of 2018. Gross margin in the fourth quarter of 2018 was 65.1%, compared with 49.7% in the fourth quarter of 2017 and 58.2% in the third quarter of 2018. The year-over-year and quarter-over-quarter increases in gross margin were mainly due to increased revenue contribution from advertising which carries a higher gross margin.
General and administrative expenses were US$4.9 million, compared with US$4.1 million in the fourth quarter of 2017, and US$3.1 million in the third quarter of 2018. The year-over-year and quarter-over-quarter increases were mainly attributable to increased bad debt provisions. Sales and marketing expenses were US$4.4 million, compared with US$6.8 million in the fourth quarter of 2017, and US$4.8 million in the third quarter of 2018. The year-over-year decrease of 35.1% was mainly attributable to the reduction of consulting fees related to commodities brokerage business and sales commissions. The quarter-over-quarter decrease of 7.4% was mainly attributable to the reduction in advertising.
Research and development expenses were US$2.9 million, compared with US$3.8 million in the fourth quarter of 2017 and US$3.5 million in the third 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 throughout different business units. 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$12.3 million, compared with US$14.7 million in the fourth quarter of 2017, and US$11.3 million in the third quarter of 2018. The year-over-year decrease was mainly due to improved efficiency and effective cost controls. The quarter-over-quarter increase was mainly due to bad debt provisions. Loss from operations was US$5.4 million, compared with a loss from operations of US$8 million in the fourth quarter of 2017 and a loss from operations of US$6.3 million in the third quarter of 2018.
Net loss attributable to China Finance Online was US$4.4 million, compared with a net loss of US$8.4 million in the fourth quarter of 2017 and a net loss of US$6 million in the third quarter of 2018. Fully diluted loss per ADS attributable to China Finance Online was US$0.19 for the fourth quarter of 2018, compared with fully diluted loss per ADS of US$0.37 for the fourth quarter of 2017 and fully diluted loss per ADS of US$0.26 for the third quarter of 2018. Basic and diluted weighted average numbers of ADSs for the fourth quarter of 2018 were US22.8 million, compared with basic and diluted weighted average number of ADSs of 22.7 million for the fourth quarter of 2017. Each ADS represents five ordinary shares of the Company.
Now let me walk you through the 2018 full year financial results. Net revenues for full year 2018 were US$45.5 million, an increase of 6.7% compared with US$42.6 million for 2017. Net revenues from financial services for the full year 2018 were US$23.1 million, a decrease of 18.3% compared with US$28.2 million for 2017. Net revenues from the financial information and advisory business for the full year 2018 were US$14.9 million, an increase of 45% compared with US$10.3 million for 2017.
Revenues from advertising services for the full year 2018 were US$7.3 million, an increase of 103.8% compared with US$3.6 million for 2017. Gross profit for the full year 2018 was US$28.6 million, an increase of 38.4% compared with US$20.7 million in the full year 2017. Gross margin was 63% compared with 48.5% in 2017. Net loss attributable to China Finance Online for the full year 2018 was US$20 million, compared with US$36.7 million in 2017.
Fully diluted loss per ADS attributable to China Finance Online was US$0.88 for the full year 2018, compared with US$1.62 in 2017. Basic and diluted weighted average numbers of ADSs for the full year 2018 were 22.8 million.
With that, this wraps up my prepared summary, and operator, we are ready for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Bob Wilson. Please ask your question.
Yes, thank you and good morning. Your R&D and selling expenses continue to go down in the fourth quarter. However, your G&A expenses went up significantly. Do you think the outstanding receivables may be at risk?
[Foreign Language] The increase of G&A expense is mainly due to the bad debt provision for the security deposit in our former commodity trading business. This is a one-time non-recurring event. As we are not sure whether the deposit – the security deposit will be achieved we made such adjustment in our book. But again, it's a one-time adjustment. And so that's causing an increase on the G&A expansions for the fourth quarter.
Okay, thank you. Also your advertising business had a strong quarter. Do you think you can continue to grow them into a major revenue source like other portal companies?
[Foreign Language] Reviewing Alexa’s ranking of the mainstream websites, the inference of our website continued to rise. The stronger influence is now being translated into increase of advertising revenue, which is a very good encouraging sign for us. At the meantime, we are also broadening our offerings by introducing more novel models, including ThinkTac for financial information services, news dissemination, and distribution and investment opportunity discovery. Our goal remains to provide mass investors and public companies with enriched services, better user experience and enhance the user value.
Okay. Thank you.
[Operator Instructions] Your next question comes from the line of Pat Murphy. Please ask your question.
Hi guys. The Chinese stock market is having an amazing rebound this year. Do you expect your revenues from individual subscription and advisory services will pick up in a significant way in 2019?
[Foreign Language] In order to promote long-term health and development of our investment advisory business, we implemented and introduced a series of upgrades and optimizations of our customer acquisition, content development and team building in 2018. Since then, we have noticed the significant improvement with the re-invigorated market sentiment and investor confidence, the restored investment confidence, we are upbeat on the future of our investment advisory business.
[Operator Instructions] Your next question again from the line of Pat Murphy, please ask your question.
Hello, Mr. Murphy, yes go ahead. Hello, Mr. Murphy, your line is open, please ask your question. Hello, Mr. Murphy your line is now open please ask your question again.
Okay, apparently the performance of your Robo-Advisor is outstanding. What kind of strategies does your program employ to achieve a positive return in a massive down market? How are they doing this year?
[Foreign Language] Since you talk about our Robo-Advisor, since its inception Lingxi has not only consistently outperformed the Shanghai Composite Index, but continuously beaten the majority of the peer product in the marketplace as well. In 2018 the Shanghai Index suffered massive loss of nearly 25%. But 95% of our Lingxi investment strategies produce positive returns. And one of our defensive strategies returned an annual growth of over 5%. So from 2017 to the end of 2018 the best performing strategy of Lingxi reached a positive 17% return. So these are encouraging to see.
To sum it up, the success of Lingxi is attributable to our fintech resource accumulation in the past years and also our commitment to developing best-in-class asset allocation system. Lingxi is essentially built upon these five star strategies from our proprietary asset allocation systems. So with this kind of level of success we're seeing in the last, about two years of performance, we now look forward to introduce these products to our institutional clients and further empowering their wealth management businesses with our technologies.
This will be the end of our question-and-answer. I’ll hand back now to our today's presenter.
Thank you for attending China Finance Online fourth quarter and 2018 earnings conference call. We look forward to speaking with you. Have a good day.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.