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

Good day, everyone, and welcome to the ChinaNet Online Holdings Second Quarter 2015 Earnings Call. Today's conference is being recorded. For opening remarks and introductions, I will turn the call over to Gregg Davis with MZ North America. Please go ahead Gregg.

Thank you, and welcome everyone to today's conference call for ChinaNet Online Holdings Inc. This call will cover ChinaNet's financial and operating results for the second quarter of 2015. The earnings press release accompanying this conference call went to the wire early yesterday morning on August 17, 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. Mr. Cheng?

[Foreign Language] Thanks Gregg. And thank you everyone for joining us today. In the first six months of 2015, ChinaNet has continued to refine and expand our broad range of products and services. Throughout the six months period, we also have seen some strong new results in our portfolio of strategic partnerships. We have worked diligently to feel this new relationship and to introduce new initiatives to our clients, while the macroeconomics environment in China has continued to challenge our business margins and bottom line. [Foreign Language] Our outlook for the remainder of 2015 remains constant despite the weaker outlook for the yuan and economic growth. We believe that our core customer base of small and medium-sized businesses will continue to see our cost effective technologies and opportunities for their sales and advertising programs. Our expanding portfolio of partnerships and recent capital investment will also contribute to diversifying our revenue streams and creating future opportunities. Together with our partners, entrepreneurs and franchise owners, we are positioning ourselves with [effect] [ph]. [Foreign Language] Despite a challenging economic climate, ChinaNet balance sheet and capital position continues to assure our position. Our partners have continued to strengthen our position as well, holding their confidence with strategic investments in ChinaNet. Most recently with Dongsys Innovation $1.25 million investment that capital infusion along with our diverse set of strategic investors and partners will be extremely positive in expanding our business directory panel with other new services to be launched in the next three years. ChinaNet has a strong commitment to the ongoing development of our technology to deliver a cutting-edge products and services to our customers and preserve our competitive advantage. Our position also allows us to follow market trends to diversify our revenue streams into mobile and offline systems. Our diversification strategy has also begun to see positive results with our strategy to provide products and services to coordination with our ownership stake with select partner companies. Our partnership with Beijing Saturday has successfully seen them at over 600 of their children's entertainment centers since we are engaged with them. We are confident with this revenue model, while we can leverage our knowledge and marketing service into their success will contribute to our bottom line going forward. In closing, I would like to thank all our employees for their commitment to ChinaNet and our shareholders. We will continue to innovate and seek new opportunities as our economic continues to face challenges. We believe our strategy to diversify our revenue and build increasingly stronger partnerships will position our company for growth in 2015 and beyond. Thank you for your patients and understanding. [Foreign Language] I would like to introduce our COO, George Chu, who will now discuss our second quarter 2015 results.

Thank you, Cheng. Good morning to investor in the U.S. and good evening to those in Asia. As Mr. Cheng mentioned, I will begin with a discussion of our second quarter results before I highlight business developments. First we will refer to the earnings press release and 10-Q filed on Monday, August 15 and more details regarding our results and operation. I will close with our outlook and operation initiatives. I will stick to this PowerPoint that will help you to understand the business. Other revenue for the first three months ended June 30, 2015 were $9.6 million representing a decrease of 7.1% year-over-year. During the second quarter revenue from improving Internet advertisement and services increased 16% to $5.8 million. We have continued to place precedent in integrating and upgrading our Internet advertising and marketing services to our business clients. As a result along with eliminating smaller clients, we successfully saw approximately 103 new clients during the second quarter of 2015. And the number of larger customers served by Liansuo our premier advertising and marketing will continue to increase. As compared with the same period last year our client's average consumption now with our Internet advertising services also increased. This improvement in Internet advertising have to offset the client search engine marketing services, TV advertising and brand management and sales channel building services from the same period a year ago. Search engine marketing revenue for the second quarter were $2.6 million this enhanced third party search engine marketing and advertising TV services this time we have our clients to look more effective key word result and prioritize and anticipate search engine results selected key words in order to increase the success conversion rate to our clients business and promotion in print mobile and PC service. We believe in this service, we will be effective to the Internet advertising services provided to our client and will have increased this overall satisfaction on all services thereby increasing recurring revenue and number of clients on online advertising and marketing services. Revenue from TV advertising was $1 million in the second quarter down from $1.8 million in the same period a year ago. We will continue to monitor our client needs, ultimately TV advertising services and work with our clients to develop non-TV shopping infomercial programs improve the popularity of this segment in the busier periods. Revenue from brand management and sales channel expansion fell to $0.04 million the second quarter. We can expect top recovery in this business segment in 2015. We are shifting all our company resources on to Internet advertising as well as all the value-added online to offline services we are about to provide to our customers. In order to increase the business program in this segment in the future period, we are already enhancing the cross-selling advertising in this business segment with our other business segmentation expansion in the Internet as we launch the O2O business solution in connection with brand management and developing solutions. Gross profits were $2.3 million compared to $1.7 million in the second quarter of 2015. Gross margin was 23.7% up from 16.4% in the second quarter of 2015, a direct result of the increasing gross margin on Internet advertising segment, 25% for the three month ended June 30. Operating expenses for the three months ended June 30, 2015 were approximately $3.6 million up from $2.97 million from a year ago period. Sales and marketing expenses decreased to $1 million from $1.51, while we continue to impact more in print and building expenses by promoting web portals plus our services and enhance brand awareness. Our operating loss for the second quarter of October 15 was $1.8 million compared to equally $1.3 million in 2014. Net loss attributable to ChinaNet for the first three months ended June 30, 2015 was $1.2 million and loss per share was $0.05 compared to a net loss of $1.3 million in the loss per share of $0.06 in the same second quarter of 2014. Excluding the share-based compensation expenses of $0.4 million the non-GAAP adjusted net loss contributed to ChinaNet stockholder in their loss per share were $0.10 million and $0.03 respectively -- $0.03 per share. So turning to our six month result, revenue for our six month ended June 30, 2015 were $15.47 million a decrease of 0.5% from $15.54 million for the same period a year ago. Increased revenue for our search engine marketing services offset declines in sales in TV advertising along with our strategy of adjustments in the brand management sales channel building services. Gross profit margin was $8.2 million and [0.5%] [ph] respectively for the first six month of 2015. Operating expenses increased by 32.5% to $6.6 million compared primarily for the six months of 2014. We report an operating loss of $3.4 million in the first half of 2015. Net loss attributable to ChinaNet common stockholder and net loss per share was $3.0 million and $0.11 for the first six months ended June 30, 2015. The weighted average diluted share outstanding were 26.6 million shares including the share-based compensation expanses discussed above $0.8 million and the non-GAAP adjusted net loss attributable to ChinaNet common stockholders the net loss per share were $2.2 million and $0.08 respectively. Our balance sheet remained solid. We ended first six months of 2015 with $4.6 million in cash and cash equivalent compared to $1 million as of December 31, 2014. We have working capital of $15.7 million compared to $17.3 million as of December 31, 2014 and a current ratio of 2.5 to 1 compared to 2.7 to 1 as of December 31, 2014. Total stockholder equity of ChinaNet was $34.2 million at June 30, 2015 compared to $36.2 million at December 31, 2014. We have $0.9 million of cash flow from operation in the six month ended June 30, 2015 compared to $0.9 million of cash out flow in the first six month of 2014. Before I discuss our outlook, I would like to summarize key developments for ChinaNet in the past few months. In May, in the first half of the year, we have entered into security purchase agreement with Dongsys Innovation Technology and also Jinrun Technology in a total $4.2 million to $4.5 million investment – strategic investment into a company. As of today we have received a total of 50% guaranteed payment from both companies. In their agreement both companies have entered into agreement with ChinaNet whereby both parties – both companies, both investors agree not to transfer shares on [indiscernible] ChinaNet prior written approval [indiscernible] after May 26 of 2016. The proceed from offering may offset these expenses would be used for working capital for technology, development, marketing for new services and product launches and probably for merger and acquisitions. The capital distribution [indiscernible] strategic investment, we are also extremely positive in our expansion of Business Direct 3.0 with other new services we will launch in the next three years. The investment is also very positive for us to help increase both market penetration in business activities in China. Dongsys Innovation is committed to provide with mobile video conference system and HD video conference system. Customers are very [Technical Difficulty] technology Dongsys Innovation enter into the household application market in 2015 launching it's more high-end services and products. And [indiscernible] is extremely popular with home and small business user because of its stability, ease to install, clear picture qualities and especially all the low [indiscernible]. ChinaNet right now as thousands of business customers in China which can use more high products and services and alter daily operation [indiscernible] to increase the transparency and security of this business operation. This is an exact type of collaboration that we would anticipate both a strategic Dongsys Innovation will lead to a new [reference] [ph] in all those regions. As of in July, while we updated our strategic investment client Baidu education technology which has expense record cost introduction of ChinaNet solution of products and services with coordination with the 10% partnership stake, which account for about RMB 1 million. More than 600 Children's Fun Park and of course ChinaNet children's entertainment center operated by Beijing Saturday have been added -- started existing 300 locations are important in the third quarter of 2015. While continuing to length its [indiscernible] big data services and marketing platform and we expect to open an additional 350 new location by the end of 2015. We are still focused on large and larger and more integrated [indiscernible] with more than 1000 square meters, while over [indiscernible] square feet per location. This has proven our [indiscernible] customers by including cash investment in addition to offering total solution of products and services. Customer will also benefit from initial market data analysis, more data services and expansion claim and marketing. We are encouraged by the rapid growth of [indiscernible] experienced with our support. The investment income from this program also contributed to strengthen [indiscernible] explore additional investment and partnering opportunities with other brands. So moving to our outlook, and from here, please turn to the PowerPoint presentation of Slide 17. So for the next -- toward the end of the year, our main focus is – our new Business Direct 3.0 which was launched in the early of 2015. And plus we have explained before this product had extremely [indiscernible] for the company as we are creating a B2b2c online to offline business ecosystem based on collaboration partnership with key major Internet players in China which namely like Baidu, Alibaba and Tencent. So from these services what we intend to do is to provide mobile enterprise solution allowing user really to access to businesses in mobile terminal services from all mobile devices from pad, from cell phones to make the online user into offline customers and back to purchasing. And so as a result, we are intend to complete a full business cycle from B2b2c making business marketing more direct effective and easier. So in Q3, we would have launched and [indiscernible] make it more user-friendly to our own customers and as well as to the end consumers from ordinary customers. On the other hand, we have initiated business partners with Baidu, which is called a good business of China. Baidu's [indiscernible] is the largest Chinese [indiscernible] platform owned by Baidu. So while we are doing this, we are also expanding further strategic operation with Baidu wallet of Business Direct 3.0 services in the late Q2. And by doing so, we are also about to enhance our security system with [indiscernible] that did have protection and securities as we are completely fully launching the Business Direct 3.0 solution. Going to the next pages, which I want to emphasize, I have seen the same slide in our last quarter this is what we call Business Direct 3.0, establish a complete B2b2c big data [indiscernible]. Now, we integrated data from all around Internet portals from those PCs as well as mobile including [indiscernible]. And we resolve [indiscernible] which we integrate them and we make the information interactive to our business customers. From here, they will combine this business data with the key Internet players like Baidu, like Alibaba so that we are creating a business online [indiscernible] ecosystem which is making the online capital flow into the outlay consumptions. So this is increasingly review and reemphasize of our action plan over the next half of 2015. We are continuing to increase marketing expenses to increase marketing awareness and tracking of organization, of course ramp up the good business of China that's one of them. Increasing R&D expenses we are continuing to develop the [indiscernible] track system, which we anticipate to complete in the late – in the mid Q4 and consumer or business available by the end of Q4 and this will be a third powerful tool that can buy all the real competing tracking system among the DSP and DMP. In addition, the other things that we are embarking right now is a cloud data base central as we have hired, appointed a new CIO, [indiscernible] Vice President join the company [indiscernible] B2B businesses. So also as I have mentioned, we will also be integrating with [indiscernible] to further enhance our hardware securities in system to pay the product customer competition data as well as their financial data. So in Q4, we will be launching B2B direct integrated like showcase with the key Internet players and fourth one is that we will also be integrating online payment system with key Internet players in the late Q3 and early Q4. So [Technical Difficulty] quick conclusion about what we are about to – and over the rest of 2015 that we are – our yearly guidance or revenue, we strongly believe that we will be achieving like $48.75 million for the full year of 2015. We will increase -- continue to increase new technology acquisition marketing solution. Now, we will also increase our [indiscernible] in terms of power management skill involvement which we anticipate [indiscernible] in Q3 and Q4. The increasingly research and development expenses on Internet security is an issue and also increasing new [indiscernible] partner companies like Beijing Saturday and [indiscernible] Technologies. And also integrating new clients and launching of new value-added services. We have a slow start in the first half and of course partner will improve after launch of new services and estimate of 2015 net loss to be around USD 6 million in total in anticipation of 50% decrease from last year. So this concludes my prepared remarks and we will now open the call to any question you may have to Mr. Cheng or myself.

Thank you for joining on us on our Q2 2015 investor conference presentation for Q2 results. And thank you for your participation. And if you have any other further question after this call, please feel free to email us at ir@chinanet-online.com. And we will respond in a proper manner. So thank you everyone for joining us today. And wish you all a great day today. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.