Gregg Davis - MZ Group, IR Handong Cheng - Chairman and CEO George Chu - Chief Operating Officer

Jeff Corfman - Symmetry Peak

Please standby, we are about to begin. Good day, everyone. Welcome to today’s ChinaNet Online Holdings Fourth Quarter and Full Year 2014 Results Call. As a reminder, today’s call is being recorded. At this time, I’d like to turn the conference over to Mr. Gregg Davis with MZ. Please go ahead, sir.

Thank you. And welcome everyone to today’s conference call for ChinaNet Online Holdings Incorporated. This call will cover ChinaNet’s financial and operating results for the fiscal year of 2014. The earnings press release accompanying this conference call went to the wire early yesterday morning on April 16, 2015. 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 Incorporated. Forward-looking statements including 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 risks 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. Mr. Cheng?

Thanks, Gregg, and thank you everyone for joining us today. Throughout 2014 ChinaNet succeed in expanding our competitive portfolio of products and services, strengthening our strategic partnerships and building new ones. However, as we work diligently to introduce these new initiatives and saw positive results in revenues and new business relationships. The macroeconomic environment continue to challenge us in 2014, which negatively impact margins and our online. Looking ahead at ChinaNet in 2015, we are confident in our opportunities to serve the small and medium-size businesses that represent our core customer base. Our significant partnership with Baidu and their confidence in us also lift us our belief that we are on the right track. Together with our partners, entrepreneurs and franchise owners, they are positioning ourselves for success in rebounding economy. In the meantime, our capital position remains solid. Our competitive advantage with new and cutting-edge technology offering continues to diversify our revenue stream into mobile and online to offline systems. We had although begun to strengthen our diversification by making different partnerships and investments into promising companies like MediaFun and O'Yummy Investment Management where we can leverage our knowledge and marketing service into their success. But at the same time, we are mindful of in fact these new initiatives has on our margins and cash flows. In closing, I would like to thank our employees for their commitment to ChinaNet and our shareholders. They understand the challenges we face and we are not satisfied with our results. They are positioning our companies for growth in 2015 and beyond. Thank you for your patience and understanding. I would like to introduce our COO, George Chu, who will now discuss our fiscal year 2014 results.

Thank you, Mr. Cheng. Good morning to the investors in the U.S. and good evening to those in Asia. As Mr. Cheng mentioned, I will begin with the discussion of our fiscal year 2014 results before I highlight a few recent business developments. Please refer to the earnings press release and 10-K we filed on Thursday, April 16, 2015 and Wednesday, April 15, 2015 respectively. For more details regarding our results and operation, I will close with our outlook and operational initiatives for 2015. Total revenue for the fiscal year ended December 31, 2014 were $38.9 million, an increase of 28% year-over-year. Revenue from internet advertisings, search engine marketing and other related technical services. For the year ended December 31, 2015, it increased by 51% to $31.3 million compared to the same period a year ago. Search engine marketing service designed to help customers optimize their align search, marketing effectives and maximizing cost per leads, generated from our integrated Internet marketing solutions and partner. We generated about $30 million of revenue in 2014 and it was the main driver of our revenue growth. Management -- we believe this service will help raise overall customers’ satisfaction, thereby increasing recurring revenue and market share for online advertising marketing services in the future. Revenue from TV advertising was $6.4 million in 2014, down slightly from $6.8 million in the same period a year ago. The year-over-year decrease in TV advertising revenue was offset by the collective efforts made by the management in response to the adoption of restriction of TV infomercial broadcasted in provincial satellite television station in China. In response to uncertain business government policy, management shifted resources into the online advertising marketing businesses while maintaining the ongoing relationship with selective provincial satellite television stations for any potential use in future. Revenue from brand management and sales channel expansion fell to $0.9 million in 2014 from $2.6 million in the same period a year ago, due to the slow recovery of economy in 2014, tightening of customer advertising budget. We do not expect prompt recovery from this business segment in 2015. Although cost of sales for 2014 was $32.3 million, compared to $16.6 million for 2013, gross profits were $6.6 million compared to $13.7 million in 2013. Gross margin declined from 45.3% in 2013 to 17% in 2014 The primary reason for the year-over-year decrease in the gross margin was lower margin for our new search engine marketing services and the increased cost of Internet resources purchased from key search engines. And technical services providers related to lead generation, direct labor and other costs with brand management. Sales channel building services declined. We expect margins will gradually improve but remain under pressure for next few quarters until the revenues and our new services reach a critical mass. Operating expenses for the year ended December 31, 2014, excluding gains and losses related to disposal of intangible assets and VIEs increased by approximately $21.5 million, up from $12.3 million for fiscal year 2013. Excluding the share-based compensation expenses related to restricted shares of common stock and common stock purchase options issued to employees, management, directors included in operating expenses. General and administrative expenses decreased by 58% from $7.7 million to $3.2 million. This was a result of a decrease in allowance for doubtful accounts and overall cost reduction plan executed by management during the year. At the same time, sales and marketing expenses increased to $6.0 million from $2.6 million, while we continue to invest in brand building expenses for promoting our services, portals and solutions to enhance brand awareness. We believe this investment will add incremental sales opportunities and help further diversify our revenues in the long. Our operating loss for fiscal year 2014 was $14.6 million, compared to a net income of $0.6 million in 2013. The drop in operating income reflects lower margins in each of our business compared to the same period a year ago. Net loss attributable to common stockholders for the year ended December 31, 2014 was $13.7 million and net loss per share was $0.61. The weighted average outstanding was approximately 22.4 million compared to 22.3 million in the year ago period. Our balance sheet remained solid. We end the year with $5 million in cash and cash equivalents, compared to $3.4 million at December 31, 2013. We also had term deposit of $3.5 million at year end of 2014 essentially unchanged from the end of 2013. Working capital was $17.3 million on December 31st and the current ratio was 3.7 to 1. Total shareholder equity of ChinaNet was $36.2 million at December 31, 2014, our current [indiscernible] balance decreased by 58% to $2.4 million as of December 31, 2014, compared to $7.6 million as of December 31, 2013. We had cash also for operation of $2 million in year ended December 31, 2014, compared to $2.8 million of cash inflows for operations for 2013. The increase in cash outflows for operations were primary due to the increase in deposit and prepayment to internal resources supply as a result of expanded corporation with the two search engine in China. Before I discuss our outlook, I would like to summarize a few key developments for ChinaNet in the past few months. In November 2014, we build a major update to 28.com portal with upgrades in site navigation and streamlining of its comprehensive category listings, aesthetics and style upgrades to its competitor extend with dynamic features to attract customers including new photography. This upgrade will continue as we work building up more membership services in the next two years. And later on we launched a new value added services for SMEs, Wisdom Eye, a two-way online to offline O2O online Customer Relationship Management system individually customized for the SME industry in December 2014. SMEs CRMs provide now seamlessly and efficiently managed their marketing, advertising, sales resources, check their cost permit and cost per sales, improving advertising effectiveness and launch their sales issues, which now can dramatically generate into good core combining powering data analysis providing a strong basis for business decision to support their sales growth. We had [indiscernible] event take place providing last few months of [indiscernible] in December and obviously, you can level upon launched in collaboration between our companies. In the following months of December 31st we launched our Business Direct 3.0 in cooperation with Baidu Direct Reach. Business Direct 3.0 is a technically marked-up service based on the Baidu Direct Reach mobile platform for traditional service enterprises, which is centered on mobile search, accounts, maps, [ADS] [ph] personalized recommendations and other ways for customers to direct Reach Marketing services. The international Business Direct 3.0 providing opportunity for the traditional service industry for China in the mobile internet, regarding detail Business Direct 3.0 which is also presented in our presentation, which I will later elaborate. In March, so to continue, in March 2015, we further entered into our relationship with Baidu for ChinaNet service partner agreement, cross-sell branded services and products in conjunction with the Direct 3.0 and Baidu's Baidu Direct Reach. In first quarter of 2015 we made a cash investment approximately 10% ownership stake in O'Yummy Investment Management, a food brand management company, exclusive partner of South Korea ice cream restaurant chain Snow Hill. In connection with investment, ChinaNet will corporate with the company to expand the Snow Hill chain in China. The investment amount is small, which is only about RMB1 million, but its still critical and statistical move of the company as we will -- as we all looking into opportunities of doing some revenue share with along with the expansion of our customers. Later on which is recent news that we have announced, that we also made a strategic alliance with Gridsum Technology Company to develop an all-around online-to-offline internet and mobile search engine marketing and search engine optimization solution for SMEs in China. In April 2015, our subsidiary, Quanzhou Zhilang Company partnered with a real estate developer to initiate an online to offline business zone near Huaqiao University in Quanzhou, Fujian Province, China to help establish and grow new commercial occupants by using Business Direct 3.0 solutions in connection with brand management and developing solution, iMAP, which is in response to the slowdown of our brand management and businesses. Moving to our outlook, which if you have the presentation, we can turn to the page 20. So to me, this is the first time that we have this test for future of our Business Direct 3.0, which was now public announce due to confidentiality but now it’s pretty much done and we will be preparing some showcases within the next three to four months with Baidu. This product is the most important action in 2015 for the company and Direct 3.0 is a technical marked-up service based on Baidu Direct Reach mobile platform. So these businesses will also provide mobile enterprise solutions, allowing user direct access to business in the mobile terminal services, making online users into offline customers. Business Direct 3.0 will complete a full information across cycle, from B2b2c. The reason we used the small b which is I think fight as the merchandiser, the merchandise, franchisee, the retailer is considered as a small b2c, which is customers, making businesses marketing more direct, effective and easier by leveraging all the mobile solutions that we have in market. So through Q3 2015 we will be launching select clients to ensure a fast penetration in the future, which means that we will be fully productized this solution and we will be commercialized into the full scale sale. So quite sure and interesting in Quanzhou the business, online to offline business zone near Huaqiao University will be the first example in China to leverage our Business Direct 3.0 as well as with the Baidu Direct Reach and also we will be combining the Baidu Wallet for Business Direct 3.0 as a showcase in Q2 and Q3 in 2015. Once everything is confirmed, we will also do a demo pricing mix. And in addition, this is a Direct 3.0 which is a pretty crucial turn that which is very crucial especially in the information security. So as a result that we are in discussion and we are preparing to sign a long-term strategic marketing alliances agreement with Thales Group for data protection and security for Business Direct 3.0 services as we will be using Thales security solutions to a Business Direct 3.0. So that is Business Direct 3.0. The graph in page 21, which directly -- which simply tells that this is what we have the Business Direct 3.0. As we direct all the different traffic from the portal website, social website, sales channel website, third parties marketing platform and also as well as our own self-owned marketing media platform for example 28.com, Liansuo.com, Chuangye.com, Sooe.com, all these services, all these platforms, all the traffic that as we direct them into sale fleets. What we intend to do is that we intend to create a three cycle connections which needs the information linkage -- information linkage, which start from the information integration, integrate all the information together, which will be the big data services into the information linkage, which will be linked to user-information interactions. So as a result, the company will be very focused on the B2b2c big data services. So in page 22, which detail us -- which give more details about what I just said about the B2b2c, our big data services. So what we intend to do, we intend to create an SME online to offline two-way echo system. From the very beginning that SME demands that from the start-up entrepreneurs direct-to-mobile terminals and through the right marketing solution and channels, they will reach more customers and work direct into the offline consumption in the SME offline space. So starting from the SME demands that we will be helping them the small medium crisis in the information or we call it -- or by the term right now is called big data analysis exchanges to help entrepreneurs to more successfully start their businesses by attracting more online customer into the offline consumptions. As a result, this Business Direct 3.0 not -- is not just an online marketing solutions, which will be also integrated, is what we call right now a 4P integrated marketing solution, which include an EIP, APP, POS and Portal systems, which we will be combined this together in the showcase that we are working with Baidu. So the action plan for 2015. First of all, we will continue to increase the marketing expenses to improve market awareness, attract more customers and the traffic optimization. We will continue to increase the R&D expenses. We will be developing the CloudX Tracker System, which is an extension of Wisdom Eye, which is the Portal Tracker System will be combining the real-time biddings, the [DMP] [ph], the ESP tracking system for SEM, SEO and also content tracker, administrator, especially on the social tools that we use right now in China and put into a reach. Cloud database centers, as we have hired a new CIO in charge of data analytical system for our B2B businesses. Upgrading our overall security to better protect customer confidential data that will be also key focus of the company for the next starting from 2015. While first as I just mentioned, now we will be using power security solutions and of course launching of Business Direct 3.0 with integration of 4P system into this Business Direct 3.0 services. So as I have mentioned that in 2015 for the next few months, we will be continuing, we will be focused mainly on the Business Direct 3.0 services. As we’re not only combined with the Business Baidu Direct Reach services, we will also combine the Baidu Wallet into our total solution. And second, that we will be also attracting one to two more international franchise businesses into China. Once it’s finalized, we will public announced. And also, we all are looking for the strategic alliance of credit product providing to the entrepreneurs as well as some media enterprises as key major banks in China. And also like why I just mentioned that we will be doing some long-term strategic marketing lines on TELUS Group for data production securities and that’s where we will be looking to corporate with the number one online to offline social website in China and also some B2B sites in China else where. So in addition, we continue into a serious discussion with Alibaba cloud. We are also in the process of doing some showcases. Once everything falls in line and start, more details will be public announced by Q2 to Q3. And the other things for investors, we have been doing witnessing and relaunching our corporate websites, which will be completed before our virtual war show in Q2 after our first quarter result release. And in addition, we will be looking for some non-TV war show in the U.S. after our first quarter initial results. And also we are looking for investment into more companies like well what we did with O'Yummy, very small amount that give company a great chance to expand our revenue streams along with the success of our customers. So for 2015, on a full year guidance, our revenue would anticipate typical, at least by about 25% to 28% to $48 million. And which -- also in 2015, we steadily grow in revenues. We will also continue as I mentioned increased spending on new technology acquisition marketing places. And also that we are going through some HR optimizations that in terms of power maintenance, skill developments, which will be later announced at after our Q1 results. But we will do some changes in the organization for long-term developments as we are in a continuous immediate need of more technical talents to join the company. Of course, we will be spending more on the research and development expenses on Internet security, web-based, sales and management, online to offline services and our integrated 4P system. And as we continue, we will be looking for developing strategic business alliances with partner companies, the partner I mentioned will be discussed from showcases and algorithms to make sure that our product can really pickoff in sales and as well as profits in the long. We do have a slow start in Q1, as a result of Chinese New Year and of course, SME has been slower than before. But we believe that gross profit will improve after launching of our new services industry. So, we did anticipate that 2015, we will still be active. But we anticipate that the loss will be reduced tremendously in 2015. So this concludes my prepared remarks. And now, we will now open the call to any question you may have for Mr. Cheng and myself.

Thank you, sir. [Operator Instructions] We’ll take a question from Jeff Corfman with Symmetry Peak.

Hi, guys. Thank you for taking my question. I have three quick ones, if I may. Could you just help me understand a little bit more about your advertising solutions, what it actually does? Secondly, when do you expect to be profitable, what quarterly revenue run rate, are you going to need to hit that profitability? And then if you just have some long-term operating margin expectations, what would they be? Thank you so much.

Thank you. So to keep a pretty similar case, very similar case but not exactly the same would be in U.S. what you came looking for is the solution called [indiscernible], which was recently purchased while probably last year purchased by salesforce.com, which is a one-to-one sales lead generation solutions and that’s what we do. So if we will use the U.S. term, what we provide the total solution is called the -- we provide the sales-lead solution as well as the sales conversion rate solutions. So for example, in my presentation, I’ve mentioned the CloudX Tracking System, which will help the SME to track not only the sales-lead conversion rate but also track how many leads are converted to real sales, that what we call a CPS. So basically our core competences are the solutions that we use to provide business specific on sales leads and also have the companies to track this sales lead to become real offline sales. So that’s the solution we’d do. For your second question, that we do anticipate the company return to profitability latest by Q1 next year, latest by Q1 last year. So for long terms, I would be anticipating the company to remain at least on 25% to 30% bottom margin in the long run. Off course, right now we are in a heavy capital expenditure, right now. As we are improving and also developing technologies and also creating and building up all the key alliances, so -- as well as we are building up our real-time bidding systems. So that’s why for last year and for this year, our spending was still huge. So that’s why we anticipate on popularity latest by Q1 in 2016?

Okay. Great. And then do you think, you will be raising more money in the future? Thank you so much and congratulations.

Thank you. Yeah, I mean, on the investment, great question. You know, every good company always need money to expand, so do we. Okay. But right now, as you can see, our cash is in a very healthy position but of course more capital will facilitate faster expansion of the companies. So I can’t say yes or no to that question but if we do find a right financial investor or strategic financial investor into the companies that will be great to the company and also to the shareholders.

Great. Thank you. We look forward to talking to you soon.

Thank you.

[Operator Instructions] It looks like we have no further questions at this time. So I’d like to turn it back over to our speakers for any additional remarks.

Well, thank you. Thank you everyone for participating in this meeting today. And we appreciate your patience in everything and your support to the company. While Mr. Cheng and myself, we promise that we will make this company from a good company to a great company in the long run. So as a result, we need your support. So we will be more and more in details to disclose our actions and progress of the companies to keep you as investors intact with the company developments and that’s the promise we are working, especially starting from 2015. Thank you and thank you for your time. And I wish you all have a great day. Thank you.

That does conclude today’s conference. We thank everyone again for their participation.