Gregg Davis - MZ, North America Handong Cheng - Chairman & CEO George Chu - COO

Welcome to the Chinanet Online Holdings' First Quarter 2015 Results Call. [Operator Instructions]. At this time, I’d like to turn the conference over to Mr. Gregg Davis of MZ North America. Please go ahead, sir.

Thank you and welcome to today's conference call for ChinaNet Online Holdings Incorporated. This call will cover ChinaNet’s financial and operating results for the first quarter of 2015. The earnings press release accompanying this conference call went to the wire early yesterday morning on May 18, 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 includes 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 would 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. George the floor is yours.

Thanks, Gregg and thank you everyone for joining us today. In the first quarter 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 macro-economic environment continue to negatively impact margins and our bottom-line. In the reminder of 2015 we’re confident in our opportunities to surface small and medium sized businesses that are core customer base. Our different partnership with Baidu and confidence in us also bolsters our outlook interest together with our partners, entrepreneurs and franchise owners, they are briefing ourselves in a strategic position for growth moving forward. In the meantime our capital position remain strong, further qualify for the 3.5 million strategic investment from fewer [ph] technology. We think it's capital induction will be extremely positive in our expansion of business direct 3.0 with our new services to be launched in the next three years. It is also accompanied for us to help increase our market penetration in SME segment. Furthermore we have found a great synergy with serious [ph] technology for new business revenue model. In the same way the city government with new technology to monitor the cost of public construction project and maintain a fair and transparent and selection products. China's SMB business owners have also utilized Gridsum [ph] technology's product and services. SMEs as always can monitor cost, increase the transparency of their [indiscernible] and purchasing products and find the best type [ph] to qualify quality supply on service need and on e-commerce on internet or mobile. It is this type of collaboration that we will anticipate from a strategic investor like Internet Technology. We believe it will lead to a new revenue stream in the future [Technical Difficulty].

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Sorry for the interruptions. In closing I would like to thank our employees for their commitment to Chinanet and our shareholders, we understand the challenges we face and we’re working diligently to improve our business operations. We’re positioning our company into one platform and beyond. Thank you for your patience and understanding. I would like to introduce our COO, George Chu who will now discuss our first quarter 2015 results.

Thank you, Cheng. [Technical Difficulty] discussion of our first quarter 2015 results. Before I highlight a few recent business developments. First prefer to the press release and the 10-Q filed on Monday May 18, 2015 end of May 15, 2015 [ph] respectively. For more details regarding our result and operation I will close with our outlook and operation initiatives. For the record our first quarter ended March 31, 2015 for 5.8 million an increase of 13% year-over-year increase in revenue for our search engine marketing services. Revenue heightened surfing to market and other related technical services for the quarter end and March 31, 2015 increased by 56% to 5.6 million compared to the same period a year ago. Search Engine Marketing services decide to have customers -- from search marketing [indiscernible] and maximum for sales lead generated through our integrated internet marketing solutions for the main side of our revenue growth. This service will help relate overall customer satisfaction will then increase recurring revenues and market share for online advertising and marketing services in the future. Revenue from TV advertising gross margin, year-over-year decrease in TV advertising revenues was offset by the efforts made by the management in response to our restrictions on TV broadcast [Technical Difficulty] in China. In response to our certain business [ph] problem and policies. We shifted more resources in two of these online advertising businesses while maintaining the ongoing business relationship with some satellite stations. The outlook of our first quarter was 4.1 million compared to 3.8 million for 2014, gross profits were 0.9 million compared to 1.4 million in 2014. Gross margins declined from 26.3% in December 2014, to fixed income 0.4% in 2015. The primary reason for the year-over-year decrease in the gross margin were lower margin for our search engine marketing services and the increased cost of internet resources which is our key source engine and the technical service provided related to lead generation and direct labor and our cost management of building resources to clients. We expect margins to improve while remain under pressure for the next few quarters until revenues for our new businesses reach critical mass. Operating expenses for the quarter ended March 31, 2015, were approximately 3.0 million up 2 million for the first quarter of 2015.

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Sorry for the interruption. Somehow we have this terrible technical issues. To continue from where I left, sales and marketing expense increased to 1.2 million from 0.6 million while we continued back in brand building expenses for promoting our website and services to enhance brand awareness. We believe this investment will add incremental sales opportunities and help further diversify our revenues. Our operating loss for first quarter of 2015 was $3.1 million, compared to a loss of $0.7 million in 2014. 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 first quarter ended March 31, 2015 was $1.8 million and net loss per share was $0.07. The weighted average share outstanding was approximately 76.4 million compared to 22.4 million in the year ago period. Our balance sheet remained solid. We ended the year with $2.2 million in cash and cash equivalents compared to $5 million at December 31, 2014. We also had term deposit of $3.5 million at year end of our quarter essentially unchanged from the end of 2014. Working capital was $16 million on March 31, 2015 at a current ratio of 2.4 to 1. Total shareholder equity of ChinaNet was $34.7 million at March 31, 2015, our cash out flow from operation of 3.3 million in the quarter and the March 31, 2015 compared to 1.4 million of cash inflows for operations in the first quarter of 2015. The increase in cash outflows for operations was primary due to the increase in deposit and prepayment to internal resources supply as a result of expanded corporation with the key 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. [Indiscernible] added services for small, medium enterprises [indiscernible]. The online to offline or O2O customer relationship management individually customized for the SME industry in December 2014. SMEs CRMs provide now seamlessly and efficiently managed their marketing, advertising, and sales resources, check their cost permit and cost per sales, improving digital advertising effectiveness and launch their sales efficiency, which now can dramatically generate extensive report in combining powering data analysis providing a strong basis for business decision to support their sales growth. We had meaningful event take place providing last few months of [indiscernible] in December and obviously our partnership and collaboration between our companies. The follow-on in January we launched our Business Direct 3.0 in cooperation with business direct reach of Baidu. 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, personalized recommendations and other ways for customers to direct Reach Marketing services. The international Business Direct 3.0 provides an opportunity for the traditional service industry through transit [ph] through the mobile internet. In March, 2015 we continue to entered into our relationship with Baidu and demonstrated a quick [indiscernible] service partner agreement.

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Sorry for the interruption. So to continue on where we left, in March 2015 we further cemented our relationship with Baidu that demonstrated an increased success of Baidu Direct 3.0 but service partner agreement to 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 for 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 is the first trial investment that we have had and we have reached a great stats and great possibility for the investment similar to this [Technical Difficulty]. We made a strategic alliance with Gridsum Technology Company to develop an all-around O2O internet and mobile search engine marketing and search engine optimization solution for SMEs enterprises or SME businesses in China. In April 2015, our subsidiary, Quanzhou Zhilang Company partnered with a real estate developer to initiate an O2O 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 solutions, iMAP. In April we’re now back into operate our full solution of product and services we typically prove a new added revenue model for it's private SME customer, Beijing Saturday Educational Technology. We’re also currently implementing the new present Direct 3.0 service with Beijing Saturday. With focus on the third and fourth [indiscernible] to help create strong demand we expect Beijing Saturday will open 600 new parts in 2016 with our help. Also in April, our subsidiary Liansuo.com signed an agreement with Haoxiangni Jujube to create a one-stop purchasing service platform and expand Haoxiangni Jujube's online stores. Haoxiangni is the largest jujube enterprise in China and has the most types of Jujube products of its competitors. The company has nearly 2000 stores across more than 280 cities. Liansuo.com is helping Haoxiangni create a one-stop purchasing service platform and expand the online stores through its active marketing program that includes traditional and online advertising, trade shows and referrals. The number of larger customers served by Liansuo.com has seen steady growth because of the premium advertising efforts and effective marketing web portal. In May, we entered into a definitive securities purchase agreement with Jinrun Technology to raise $3.5 million pursuant, we take the 50% of the shares, we receive the transact of 50% by June 4, 2015 and the third tranche of the remaining [indiscernible]. The proceeds from the [indiscernible] will be useful from technology recent development, marketing for new services and especially Baidu 3.0 and product launches and also for potential mergers and acquisitions. Also in May we entered into a strategic alliance with Shanghai Pudong Development Bank and signed a cooperation framework to launch a credit card and loan microcredit product for small enterprises and individual entrepreneurs including franchisees and chain store investors.

Please standby, the speaker's line has disconnected. And the speaker has rejoined. Please go ahead.

Thank you everyone for your patience. We may have experience some technical issues today but we will definitely continue with the presentation and we will come to the questions. The product will be intended to offer, under the authorization of ChinaNet, unsecured and free mortgage or credit micro-loan through credit card to the recipients to be used in the merchant shops for business related operating costs. The product is now in the design and finalization process, and will be officially launched by the third quarter of 2015. So with this highlights I will [Technical Difficulty] if you look at the presentation today we can certainly look at presentation at page 19. For Direct 3.0 what we tend to do is that we tend to establish our compliant B2B B2C fixed data involvement. Perhaps the customer can more in [indiscernible] which will [Technical Difficulty] small medium businesses in all platforms. So what we do is now we do the future information interaction will integrate all the information and will link all the information from all different marketing channel or digital advertising channel from [indiscernible] online to offline sites, third party marketing platforms and also our media platform and portals including [Technical Difficulty]. So we can see in page 20, we will see what we accomplished in small medium enterprise online to offline, offline to online system. When we see the [indiscernible] on the right corner which will represent small medium enterprises or for the small medium businesses. We happen to lease up [ph] we have information and match with the entrepreneurs and of course these small medium enterprise specific and also with entrepreneurs they all have marketing demand. In spite the collaboration our business directive from zero we have accomplished from mobile push market, the [indiscernible] in each of the SME service outlets. So at least it's true online to offline and offline to online service. So in this system we’re now evaluating the solution that is acquired for the past nine years to integrate sales marketing which included VIP, including the product, including the [indiscernible] and includes the all mobile factors. So in this key marketing contents, end customers can let others in their platforms to push their messages and [Technical Difficulty].

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So to continue, let's hope this system from the mobile end -- for internal maintenance systems and [indiscernible] which increase the membership for those for group wide -- different kinds of products which increases the membership products for group wide [Technical Difficulty] also be integrated with the headquarter system management, strengthen management, membership management and also a cash flow management. And that is why we integrate sales across marketing. [Indiscernible] we complete the whole solution for business direct frequency. So for 2015 I will just reemphasize, our key focus, that will increase our marketing activities to improve market awareness and our internet traffic optimization. We will increase our R&D expenses as we’re integrating the business Direct 3.0 solution with this overall system. And also we’re now developing our traffic system that in combination with recent partners [ph]. So by completing this whole system we will be able to cut sales from the big B to small B which it can be considered franchise fees, merchandize fees or chain stores and attract all the way down to the end consumers how they stand, how they consume in each stores. And through this system we will be able to feel the involvement of competing system BMP and ESP [ph] for small medium enterprises small medium businesses to reach marketing or advertising reach versus that can get online, in a core effective and efficient way. And those will be by building our [indiscernible] that’s what our new CIO will be the in-charge now and we will be upgrading our overall security system to better product customer commercialization data. So, let's turn to page 23, we will look at our full year guidance, our revenue will grow to 48.75 million but we will be expecting our new technology acquisition, market expenses and also we have this new HR renovation program in terms of power management and skill development which is a program that will do for the faster development of the company. And overall -- before that we will increase our R&D expenses to fully integrate our internet securities [Technical Difficulty]. And also we will be increase our investment expenses to developing strategic business alliance with partners and integrating revenue on our new value added services. We do have a [indiscernible] in Q1, our gross profit will improve after the launch of our new services, so for this whole year we anticipate

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Thank you everyone. So it comes to the last end, we view this year increase our spending, R&D and other cost related to the development and expansion of the company of our new services. We do anticipate a loss of around 5 million to 6 million which is an improvement from the last year of a rough 14 million. So this concludes my prepared remarks. We will now open the call to any questions you may have for Cheng or myself.

So thank you everyone for joining us in the call today. And we welcome any questions by email or to our IR firm MZ Group and if there is any introductory [ph] company in China please contact Maggie or you can send an email at ir@chinanet-online.com and we will make proper arrangement for you. So thank you and wish you all have a great day. Thank you.

And that will conclude today's call. We thank you for your participation.