Ted Haberfield - MZ Group Handong Cheng - Chairman and CEO George Chu - COO

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to ChinaNet Online Holdings second quarter 2013 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today August 19, 2013. I would now like to turn the conference over to Ted Haberfield of MZ Group. Please go ahead, sir.

Thank you and welcome everyone to today’s conference call for ChinaNet Online Holdings. This call will cover ChinaNet’s financial and operating results for the second quarter 2013. The earnings press release accompanying this conference call went to the wire in the morning of Thursday, August 15. On our call today is ChinaNet’s Chairman and CEO, Mr. Handong Cheng and the company’s COO, Mr. George Chu. Before we get started, I will read a disclaimer about forward-looking statements. This conference call may contain, in addition to historical information, forward-looking statements within the meaning of the federal securities laws regarding ChinaNet Online Holdings. Forward-looking statements include statements about plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are different than historical facts. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from expectations reflected in these forward-looking statements. Potential risks and uncertainties include change in demand for the company's services, the impact of competition and government regulation, and other risk contained in the statements filed from time-to-time with the SEC. All such forward-looking statements, whether written or oral made on behalf of the company are expressly qualified by these cautionary statements and such forward-looking statements are subject to risks and uncertainties and we caution you not to place undue reliance on these. At this time, I'd like to turn the call over to Mr. Cheng who will make some brief opening remarks. Mr. George Chu will provide translation and be your main host for today’s call.

[Foreign Language] Thanks Ted, and thank you everyone for joining us today. Most of you who have followed our company for the past several years, are keenly aware of the many changes in China’s economy and policies. We're always [inaudible] we’re well positioned to benefit from China growth. [Foreign Language] First and foremost, the political leaders in China are intensely focused on positioning the country’s economy to one that is more [balanced] [ph] with a particular emphasis on encouraging consumers and small businesses to become more meaningful contributor to the overall economic growth, because we have [seen] [ph] in the past [few] [ph] years the millions of dollars developing one [type product and] [ph] services exclusively for small businesses owners and entrepreneurs. We are more prepared than almost any public company to capitalize on these changes. [Foreign Language] The other factors that favors our launch of strategic [inaudible] and entrepreneurs worldwide are looking to sell their products in China. Over the past few years, we attended dozens of trade shows and conferences throughout Asia and developed relationships with these business owners. [Inaudible] they allocate more funds for expansion overseas. [We of course will help them] [ph]. One last point that I want to emphasize again we have remained [inaudible] of the really challenging time, while we continue to invest in new services and technologies. For example our [inaudible] businesses provide very strong growth for us in the past year as a result of investment made [2 to 3] [ph] years ago. There is one example of [inaudible] by expanding to new markets overseas. CNET [inaudible] stronger and more resilient company that keeps capital up succeeding in a variety of market conditions. [Foreign Language] One of the other things I want to bring up in this conference is that in the past weekend we have conducted a new product launch combined with our appreciation conferences with our key customers, and in these conferences, we have gained tremendous sales momentum as well as [inaudible] amount of sales [orders] [ph] which will be public… [Technical Difficulty]

Excuse me, this is the operator, there has been interruption in the call. The conference will resume shortly. Thank you. Please resume.

I do apologize for disconnection, the line just cutoff. So by all means I just explained, I will just translate what Mr. Cheng said. In the past weekend, we have conducted a franchise conferences in China and in this conference we invited our 200 top tier clients in this conferences, and in these conferences we also did a new product launch which has gained tremendous review and feedbacks from our key customers as well as sales orders which will be publicly announced in the next couple of days. So overall, thank you for your interest in ChinaNet. George Chu, our COO will now discuss our second quarter results.

Thank you, Mr. Cheng. Good morning to investor in the U.S. and good evening to those in Asia. As Mr. Cheng mentioned, I'll begin discussing our second quarter results before I highlight a few recent business development. Please refer to the earnings press release and 10-Q we have filed on Thursday, August 15, and Wednesday, August 14, respectively as well as the PowerPoint presentation for these conferences which can be downloaded from our website under events and presentation. And then after explaining, I will close with our outlook and guidance. We have mixed results for the three months ended June 30, 2013. Total revenue was down 32% to 8.9 million, while gross profit was only down 4% to 3.6 million. Our largest and most profitable businesses Internet advertising grew revenue slightly year-over-year. We added new customers during the quarters in varieties of industries, especially in food and beverage, clothing and [inaudible] as well [accessories] [ph] and education compared to second quarter of last year. We have increased from 855 paying clients to about 1,368. While our clients remain cautious with their average spending with us, we’re encouraged by the fact that we are clearly outperforming many of our peers and number of clients are growing and our client base are also growing very aggressively. We believe that the strong value proposition [inaudible] will position us well to take additional market share. Revenue from TV advertising was $2.5 million, down almost 60% compared to $6.1 million in the same period a year ago. The year-over-year decline in TV advertising in the second quarter reflects our strategic decision to [inaudible] our TV advertising, purchased on behalf of clients and allotted [inaudible] TV ads we purchased [inaudible] to promote our TV reality show. As we have stated many times on prior calls, TV advertisement is not a core component of our growth strategy given low margin [generated for us] [ph] and low [OI] [ph] generated for a majority of our clients. [Nevertheless] [ph] we were very encouraged that we were able to grow some margin in this business from 2% in Q2 last year to 10% in Q2 2013 by being more selective opportunistic our TV [inaudible] on behalf of our clients. Revenue from brand management sales channel expansion fell to $0.9 million in the second quarter of 2013 from $1.6 million in the same period a year ago. We had an exceptionally strong quarter a year ago and we completed the project at end of last year. We expect to resume growth in the business toward the beginning of 2014. Total cost of sales for the second quarter of 2013 was $5.3 million compared to $9.4 million for the same period in 2012. Gross profit was $3.6 million in the Q2 2013, down 4% compared to the same period a year ago. Our margin increased from 28.7% in the second period of 2012 to 40.5% in the second quarter of 2013. By reducing our sales of lower margin TV advertisement and growing our higher margin Internet advertisement sales, we were able to increase our gross margin by over 1,100 basis points. Our operating expenses for the three months ended June 30, 2013 were approximately $2.8 million, down 5% compared to the second quarter of 2012. We invested in sales and marketing and research and development, which we’re heavily invested because we believe these two area will help us sustain future growth while we reduce our general and administrative expenses. Our operating income for second quarter of 2013 was $0.8 million roughly the same as the period a year ago. Operating margin for the second quarter of 2013 increased to 9% from 6.2% in the corresponding period a year ago. Net income attributable to common stockholders for three months ended June 30, 2013 was $0.4 million and earnings per share was $0.02 compared to $0.9 million and $0.04 for the three months ended June 30, 2012 respectively. The weighted average shares outstanding were approximately 22.2 million in both periods. Moving on to our balance sheet, we ended the second quarter with $3.4 million in cash and cash equivalents compared to $5.5 million at December 31, 2012. Working capital was $25.7 million on June 30, 2013 and current ratio was 3.6 to 1. Total shareholder equity was $45.5 million at June 30, 2013, up from $44.2 million at December 31, 2012. We have slight cash outflow from operations during the six months ended June 30, 2013 compared to $1.1 million of cash inflow from operation for the first six months of 2012. We will briefly summarize our first half financial results. For additional details please refer to our 10-Q filings with SEC. Net revenue was $15.9 million for the six months ended June 30, compared to $28.1 million for the first six months of 2012. The aforementioned decline in TV advertising revenue accounted for the majority of year-over-year decrease in net revenue. Gross profit was flat year-over-year at $6.2 million while our gross margin improved significantly to 38.8% and 22% in the year ago period. We generated approximately $0.5 million of net income attributable to common stockholders and diluted EPS was $0.02. Before I discuss our outlook, I would like to summarize a few key developments of ChinaNet in the past few months. First of all, ChinaNet participated in 2013 Omni-Channel Retailing Conference, one of the most premier retail industry events in Hong Kong as well as in Asia, from June 4th to June 6th. And I represented the company. I was invited and represented the company as one of the keynote speakers to share our experiences in China. And also second one that we have entered into partnership agreement with China Business Journal, which is the second largest Business Journal in China, on July 16, 2013 to launch a contest to identify and launch good business with good growth potential. Right now China Business Journal, a leading print publication with over 920,000 weekly subscribers and over 3 million online readers, and thus we will just partner with them and we will launch this very exciting event in the second half in a more aggressively, publicly in the second half of 2013. Wahaha Commercial Co., Ltd, a real estate development subsidiary company of one of the largest food and beverage company in China with plans to expand throughout key areas in China via shopping malls, supermarket, hypermarket chain, brand discount stores, kids and convenience stores, we have engaged with them to help them to organize and host a franchise-related conference to help promote Wahaha’s expansion plant. So these are the three key things that we have accomplished in the second quarter of 2013. And for our outlook, I would like you turn to the presentation slide of our, slide you can find online through our IR website, from page 17 to page 22. First of all, in the second half, in Q3, the Q1 achieved is a initiative this is a [Inaudible] business in China. This is the event that will have just discussed about with on that collectively with China Business Journal and we believe this is going to create a tremendous sales as well as client base throughout China by going through this event and we will give monthly update on regular basis to inform our shareholders, investors how exciting this event will become. In the second initiative is that we will be launching an automatic APP creating platform for small businesses. It's called Golden Touch App. Golden Touch App is a technology portal which can allow customer to build up their own APP period of minutes. Golden Touch APP targets to host about 10,000 instant-use APPs in their respective mobile sites for customer on annual basis. And we have launched this app to allow the new products in the previous weekend event which we have received a tremendous and very positive feedback on its profits. And the official launch of these services will be in September 2013. And the other business initiatives is that we will thoughtfully enter into potential strategic cooperation and development with the third party Augmented Reality technology. Augmented Reality is a visual engagement system, combined with third party ground breaking performance based video marketing products which either Pay Per View and Pay Per Call. This technology will combine with our existing internet portals to help to give our visitors a true online-to-offline experience, also enhancing the user experience, the internet viewers experiences as well on the live presentation experience of our customers and the this will be a of potential joint venture set up in the Q3 of 2013. And the third one is more of the exciting one is that we will, we are under a joint product development with Baidu. This is one of the new concepts that we have - we have to study for over a year it's called the only channel management console. This exciting joint product developments we will be, this whole system will have possess a key functions of information verification and release, traffic analysis, and lead conversion analysis also [inaudible] monitor collectively with Baidu [requisition] [ph] system, also the internet influence or Baidu PRs and everything will be under the cloud database management systems. And the last initiatives have been mentioned in past few quarters, we have been aggressively looking for acquisition of merger possibilities. And we have identified four potential acquisition categories, the first one is mobile cloud dealer management system, mobile cloud sales management system, third one is mobile cloud membership bonus system, Mobile Cloud Ordering System Solution. So all these categories will be we are [Inaudible] to complete while we call them one stop service on cloud based services to the small business on a annual fee basis. So that's why by increasing our client base of original about 3000 currently existing over, over 15,000 client base. Once we start it should be more aggressively monetize this huge client base with our one product services, we believe that our huge growth will come in 2014. So with all this initiative in line we are reiterating our prior guidance for three year of 2013 of $36 million revenue and $1.2 million of net income as we still continued heavily invest into the branding as well as human resources as well as especially research and technologies. So in conclusion, this concludes of my prepared remarks. We will now open the call for any question you may have for the management team.

(Operator Instructions) It seems there are no questions. I would like to turn the conference back over to Ted Haberfield.

Thank you everyone for joining today’s call. If you have any questions feel free to call me direct here in the U.S. it's 760-755-2716. You can also get the information off the website from ChinaNet Online Holdings. Thanks again.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.