China Finance Online Co. Limited (FNZA) Earnings Call Transcript & Summary

Welcome to China Finance Online Fourth Quarter 2019 and Full Year Financial Results Earnings Conference Call. With us today are Mr. Zhiwei Zhao, Chairman and CEO; and Ms. Julie Zhu, acting Chief Financial Officer. Mr. Zhao will provide a summary of business dynamics in the quarter, and then Ms. Zhu will review the quarterly financial results and annual financial results. Thereafter, the management will hold a question-and-answer session. Before we begin, I 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 word belief, estimates, plan, expect, anticipates, 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 conditions. 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 and 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 like to turn the conference call to Mr. Zhao. [Foreign Language]

[Foreign Language]

[Interpreted] Good morning, and good evening. Thank you for joining today's call.

[Foreign Language]

[Interpreted] We closed out the year by cutting the total loss for 2019 almost in half compared with 2018. Excluding onetime nonrecurring charges, our fourth quarter results also indicated a sequential improvement in the net loss.

[Foreign Language]

[Interpreted] As we further improve our operational efficiency, we are also actively seeking opportunities for us to capitalize on. Despite the volatility in the Hong Kong market in the third and fourth quarter in 2019, we managed to stabilize our blended gross margin by adjusting our revenue mix. We achieved that by increasing our investment advisory services and growing sales to institutional customers. With more retail customers who are seeking professional advices to navigate through the complex market, we have observed that our innovation in the stock research system over the years are gaining attraction -- gaining traction in the marketplace. As more institutions are shifting to the wealth management business, sophisticated research tools like ours will play an increasingly important role for wealth advisers in helping their clients to formulate better financial planning.

[Foreign Language]

[Interpreted] On the user engagement front, we have made continuing efforts in the new media operation beginning in 2019. For example, we have opened and operated several accounts on TikTok, one of the most popular short video social media platform in China. We focused on production and dissemination of high-quality financial and economic content in the form of small videos, which have attracted approximately 600,000 followers.

[Foreign Language]

[Interpreted] In 2019, our media content department received a list of awards and a letter of appreciation from the China Banking Association, China Banking and Insurance Regulatory Commission and Securities Investment Association and China Financial Futures Exchange for its outstanding media coverages on the Chinese banking industry and stock markets. These accolades are government endorsements of our efforts in promoting rational and long-term investment philosophies. As the #1 financial board by Baidu Baijiahao and the #1 most popular financial news website in China by Sohu and the most influential media of the year by Netease Finance, we have built a robust presence in the large Chinese social media domain, including over 3 million followers on Weibo, over 2.5 million followers on TikTok -- TouTiao and 1.3 million followers on Baidu with accumulative reads of nearly 1.3 billion.

[Foreign Language]

[Interpreted] Benefiting from the timely, professional, enriched and fact-based content coverage of the Chinese and global financial markets, along with a diversified delivery mechanism, the influence of our website continues to grow, driving our annual advertising revenue to a new high for recent years. In addition to traditional advertising, we also expanded our offerings into enterprise value-added service in recent years. Along with the growing influence of our flagship website and the data and analysis available on our established database of public company's financial and operation records, we provide agency services to domestic, Hong Kong and U.S. publicly listed companies, which need professional advisories on gaining market exposure on their business development updates, financial reporting and major corporate events. Through our various online channels and off-line event planning and execution, our enterprise value-added service center around design and delivery of the well-crafted message to investors, which enables our clients to reach out to a large and targeted audience base with our proprietary content and research.

[Foreign Language]

[Interpreted] According to our proprietary asset allocation system, our robo-advisor product, Lingxi, provides Chinese retail investors with a wide array of investment combinations and personalized global asset allocation through the Chinese domestic mutual funds. Since its inception, Lingxi established a solid track record of balancing performance and risk management. In 2019, the balanced investment strategy of Lingxi was among the best-performing product in the marketplace, whether from a return perspective or in a risk management aspect. All strategies of Lingxi produced an average accumulative return of 11.13%, with the best-performing investment strategy achieving an 18.52% return. And all metrics, including Sharpe ratio, Calmar ratio and Sortino ratio were superior to the Shanghai Composite Index during the same period.

[Foreign Language]

[Interpreted] On May 9, 2020, we received e-mail from CMMI association to confirm our subsidiary, Genius, had successfully passed CMMI level 3 certification, which exemplify our software development, project management, processing management and delivery quality are on par with mature global software companies.

[Foreign Language]

[Interpreted] Genius is mainly specialized in Internet technologies and wealth management fintech. Genius' mission is to provide financial institutions with high-quality financial data, smart asset allocation system, wealth manager business development solutions, quantitative investment tool platform and event-driven market intelligence services. Genius leveraged its artificial intelligence technologies and professional investment research system to empower the growth of wealth management sector.

[Foreign Language]

[Interpreted] The implementation of CMMI enables us to increase quality of project management, improve R&D capability and productivity, and further optimize project operation, processing and management. This CMMI level 3 certification not only significantly help improve our product quality and customer satisfaction but also enhance the credibility and the competitiveness of Genius.

[Foreign Language]

[Interpreted] Since the outbreak of COVID-19, many businesses and lives encountered unprecedented challenges. Many parts of our business were dealt different degrees of impact. Faced with these challenges, we remain confident that our -- we remain confident that the wealth management sector presents a large unmet demand for professional services and technologically advanced products. We are committed -- we are fully committed to providing the best-in-class tools to empower advisers and investors to achieve their wealth management goals.

[Foreign Language]

[Interpreted] With that, I will now turn the call to our acting CFO, Julie Zhu, to go over the financial details for the fourth quarter and 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 presented in U.S. dollars rounded to 1 decimal point for approximation. Net revenues were USD 8.7 million compared with USD 10.7 million during the fourth quarter of 2018 and USD 8.1 million during the third quarter of 2019. During the fourth quarter of 2019, revenues from financial services, the financial information advisory business and advertising services contributed 48%, 25% and 27% of the net revenues, respectively, compared with 53%, 19% and 28%, respectively, for the corresponding period in 2018. Revenues from financial services were USD 4.1 million compared with USD 5.7 million during the fourth quarter of 2018 and USD 3.6 million during the third quarter of 2019. The year-over-year decrease of revenues from financial services was mainly due to softer equity brokerage business that was affected by weaker investor confidence in the Hong Kong market. Revenues from the financial information advisory business were USD 2.2 million compared with USD 2 million during the fourth quarter of 2018 and USD 2.4 million in the third quarter of 2019. Revenues from the financial information advisory business were comprised of subscription services from individual and institutional customers and investment advisory services. During the fourth quarter, revenues -- revenue from investment advisory increased by 62.5% year-over-year, and revenue from institutional customer grew 38.3% year-over-year mainly due to recovering investor confidence in the Chinese stock market. Revenues from advertising services were USD 2.4 million compared with USD 3 million in the fourth quarter of 2018 and USD 2 million in the third quarter of 2019. Gross profit was USD 5.5 million compared with USD 6.9 million in the fourth quarter of 2018 and USD 5 million in the third quarter of 2019. Gross margin in the fourth quarter of 2019 was 63.8% compared with 65.1% in the fourth quarter of 2018 and 62.3% in the third quarter of 2019. The year-over-year and quarter-over-quarter changes in gross margin was mainly due to revenue mix changes in the fourth quarter of 2019. However, the gross margin remained relatively stable. G&A expenses were USD 4.7 million compared with USD 4.9 million in the fourth quarter of 2018 and USD 2.3 million in the third quarter of 2019. The year-over-year decrease was mainly attributable to cost control measures and streamlined operations. The quarter-over-quarter increase was due to approximately USD 1.8 million of onetime nonrecurring changes -- charges, including higher bad debt provisions at the equity brokerage business. Sales and marketing expenses were USD 3.1 million compared with USD 4.4 million in the fourth quarter of 2018 and USD 2.8 million in the third quarter of 2019. The year-over-year decrease was mainly attributable to improved efficiency. The quarter-over-quarter increase was due to increasing expenses for marketing. R&D expenses were USD 1.8 million compared with USD 2.9 million in the fourth quarter of 2018 and USD 2.2 million in the third quarter of 2019. The year-over-year and quarter-over-quarter decreases were mainly attributable to improved efficiency after consolidation of R&D teams throughout different business units. The company continues to support the R&D in fintech segment for the further development of its fintech capabilities. Total operating expenses were USD 9.6 million compared with USD 12.3 million in the fourth quarter of 2018 and USD 7.3 million in the third quarter of 2019. 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 at the equity brokerage business. Loss from operations was USD 4.1 million compared with the loss from operations of USD 5.4 million in the fourth quarter of 2018 and the loss from operations of USD 2.3 million in the third quarter of 2019. Net loss attributable to China Finance Online was USD 3.4 million compared with a net loss of USD 4.4 million in the fourth quarter of 2018 and a net loss of USD 2.1 million in the third quarter of 2019. Excluding onetime nonrecurring charges, the net loss would have been approximately USD 1.9 million in the fourth quarter of 2019. Fully diluted loss per ADS attributable to China Finance Online was $0.15 for the fourth quarter of 2019 compared with fully diluted loss per ADS of $0.19 for the fourth quarter of 2018 and fully diluted loss per ADS of $0.09 for the third quarter of 2019. Basic and diluted weighted average number of ADS for the fourth quarter of 2019 were 22.2 million compared with basic and diluted weighted average number of ADS of 22.8 million for the fourth quarter of 2018. Each ADS represented 5 ordinary shares of the company as of December 31, 2019. Now let me walk you through some of the highlights of our 2019 full year financial results. Net revenues for full year 2019 were USD 35.5 million, a decrease of 21.9% compared with USD 45.5 million for the 2018. Revenues from financial services for the full year 2019 were USD 16.3 million, a decrease of 29.2% compared with USD 23.1 million for the 2018. Revenues from the financial information advisory business for the full year 2019 were USD 10.7 million, a decrease of 28.3% compared with USD 14.9 million for the 2018. Revenues from advertising for the full year 2019 were USD 8.3 million, an increase of 13.6% compared with USD 7.3 million for 2018. Gross profit for the full year of 2019 was USD 22.5 million, a decrease of 21.3% compared with USD 28.6 million in the full year of 2018. Gross margin was 63.5% compared with 63% in 2018. Net loss attributable to China Finance Online for the full year 2019 was USD 11.3 million compared with USD 20 million in 2018. Fully diluted loss per ADS attributable to China Finance Online was $0.49 for the full year 2019 compared with $0.88 in 2018. Basic and diluted weighted average numbers of ADS for the full year 2019 were 22.9 million. With that, this wraps up my prepared summary. And operator, we are ready for questions.

[Operator Instructions] The first question comes from [ Bob Wilson ].

In recent months, the world's economy has been severely impacted by the global COVID-19 pandemic. With such a public health care crisis, how has your business been affected? And what have you done to cope with it?

Thank you, Mr. Wilson...

[Foreign Language]

[Foreign Language] Thank you, Mr. Wilson. Let me answer your question. Like you said, since the outbreak of COVID-19, every sector has faced massive challenges. And many lines of our business were also affected by it in different degrees, especially the services that involve institutions as their employees were unable to return to work or the corporate budgets are curtailed. These, to a certain extent, affected our business development and customer acquisition. In facing such a dire market environment, on one hand, we not only managed to gradually return to full operation with a high safety measure but also proactively introduced new innovative services. On the other hand, we further improved managerial efficiencies and actively pursued capital raise. As a professional financial media, we introduced a new special reporting series centered around COVID-19 pandemic. For example, we interviewed like chief economist of large corporations, medical professionals and entrepreneurs. On one hand, through these distinguished economists and analysts, we helped our audience to better understand not only the pandemic-induced economic change but also how to seek new opportunities within the complex environment this year. And on the other hand, through videos and articles, we timely reported the thought process of these renowned executives and entrepreneurs and their leadership in like containing infection, reopening their operations and adapting to this new environment. So we're letting more people know the impressive sense of social responsibilities of Chinese enterprises. We leverage our advantages [ towards ] media to deliver the content of how these companies and entrepreneurs perform in defending themselves against the -- these unprecedented challenges. And we consider this as our social responsibility as the media. Although, like you said, the global pandemic brought difficulties upon economy and society, we still have strong belief that it isn't a reversible trend that the wealth management sector in China is experiencing a notable transformation. During the outbreak, market downturn negatively impacted many families' income as well as forced them to change their mindset of wealth management. By -- they might now start to seek professional help and advertises -- and advices. And social distancing requirement also drove financial institutions to upgrade their service forms. For example, they need to upgrade their technologies for online services and strengthen their capability to enable their employees in the client service to move from off-line to online platform. And these changes are actually exactly what we've been doing and promoting into the institutional users over these years. For example, we have developed online service platform for wealth managers and financial advisers called i-TAMP, unlocking their geographic limitations and through artificial intelligence, enabling them to perform their duties professionally and more efficiently in various situations, such as customer acquisition, marketing, customer service, client management and training, et cetera. Let me give you another example. Based upon our deep knowledge of fintech, we introduced an intelligent global asset allocation system that utilize artificial intelligence along with financial engineering to help design personalized global asset allocation plans for individual investors and institutional investors to combat the increasingly challenging market. In addition, also, thanks to our experience in B2C operations and content management for more than 2 decades, we have developed investor education system to address the need of financial institutions for their post-pandemic operation. So like I said, we do strongly believe that Chinese wealth management sector presents large unmet opportunities. So we will continue to focus on wealth management area, optimize and upgrade our product and service and empower wealth management industry with our technologies. Thank you.

[Operator Instructions] Hello, moderator, there are no questions on the queue right now.

Thank you. Thank you, everybody, for attending China Finance Online Fourth Quarter and Full Year 2019 Earnings conference call. We look forward to speaking with you. Please stay healthy. Bye.

Ladies and gentlemen, the meeting has ended. Thank you for attending. Bye.