CNET 中网载线

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the ChinaNet Online Holdings Incorporated First 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 opened for questions. (Operator Instructions) This conference is being recorded today May 21, 2013. I'd now like to turn the conference over to Ted Haberfield, MZ Group. Please go ahead, sir.

Ted Haberfield

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 first quarter 2013. The earnings press release accompanying this conference call went to the wire in the morning of Tuesday, May 21. On the 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 the 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 said 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 you main host for today’s call.

Handong Cheng

[Foreign Language]

George K. Chu

Handong Cheng

[Foreign Language]

George K. Chu

Because we work with so many different types of businesses across the country, we are looking at challenges faced by our several customers in China. We work with each of them individually to create and execute the marketing campaign that increases the sales and going on with the customers. The company expenses are limited by and they have with us because we provide ongoing support in this on a very cost effective basis. It is important to reconnect the structural improvement as China has made during these period of political and economic transition. We have significantly expanded outside China by obtaining franchisee threshold in Korea, Taiwan and United States. We have invested in new technology and added team members, stuff and marketing technology and operation. We believe these efforts will make out a stronger company with a broader array of services to serve a large market opportunity.

Handong Cheng

[Foreign Language]

George K. Chu

We are hoping we are managing through a challenging environment, while we are not going as quickly as we would like to. We are well capitalized and continue to generate strong cash flow, which will allow us to further invest in our businesses. We will continue to focus on growing sales in higher margin businesses and expand our base of customers in China and abroad. That concludes my prepared comments. Thank you for your interest in ChinaNet. I will turn the call over to George Chu, our COO. George will discuss our operations and result in greater details.

George K. Chu

Thank you, Mr. Cheng. Good morning to the investors in the United States and good evening to those in Asia. As Mr. Cheng mentioned, I will begin with the discussion of our first quarter results before I highlight a few recent business developments. First refer to the earnings press release that was distributed on today as well as the 10-Q we filed on Monday, May 20 and also the PowerPoint that’s presented via our website under the link, news and events, for more details regarding our retailing operation. I will close with our outlook and guidance. We had mixed results for the three months ended March 31, 2013. Sales were higher, brand management and sales channel building businesses and our margins improved substantially. Overall sales were down as a result of decision to reduce the amount of TV advertising, we purchased on behalf of our clients. I will discuss this further in a few minutes. Internet advertisement revenue was down 12% to $3.8 million as client continued to reduce discretionary spending. Our retention rate continued to be solid with approximately 800 active client purchase of services during the three months ended March 30 2013 – sorry end of March 31, 2013 compared to 575 in the same period a year ago, representing approximately 40% increase in customer – in paying customers. We believe this strong value proposition we offer position us well to increase our sales to these customers once this business improve. Total revenue for the fourth quarter of 2013 were $7 million, in line with our pre-announced revenues. Revenue from TV advertising was $2.6 million compared to $10.4 million in the same period a year ago. The year-over-year decline in TV advertising revenue in the first quarter reflects our strategic decision through this month TV advertisement, we purchased on behalf of our clients. Because of the fact majority of our customers are small and medium sized business with limited advertising budget, we strive to maximize the return on every dollar they spend with us. While we were continuing the TV advertising selectively for client from an economic sense strategically and as well as financially. We will continue to ship more of the advertising marketing dollar to a more cost effective channel such as our own internet and mobile advertising and keep the resources available to us when needed. Revenue from brand management and sales channel expansion jumped from $0.15 million in first quarter of 2012 to $0.53 million in this years first quarter, a 254% increase. The strong year-over-year growth reflects the effects we have had additional new customer as well as the timing of major projects. While we expect continued growth in sales and BMSCB, we do not expect to maintain this type of growth rates. Total cost of sales for the first quarter of 2013 was $4.5 million compared to $12.5 million for the same period in 2012. Gross profit was $2.6 million in Q1 2013, an increase of 8% compared to the same period a year ago. Our gross margin increased from 16% in the first quarter of 2012 to 36.6% in the first quarter of 2013, by reducing our sales of lower margin TV advertisement in growing our higher margin Internet advertisement, as well as the BMSCB sales. We were able to grow gross profit dollars amount by almost $200,000 despite 53% decline in sales, mainly caused by reduction in TV sales. Operating expenses for the three months ended March 31, 2013 were approximately $2.6 million, up from $2.3 million in the comparable period of 2012. We invested in sales and marketing and research and development, two areas that will help us sustain future growth. Our operating income for the first quarter of 2013 was a loss of $0.1 million compared to $0.1 million operating income in the same period a year ago. Due to the fact I mentioned previously, and the factor in the first quarter of this year, first quarter in terms of sales, we expect operating and revenue margin to improve for the full year 2013 in the next quarter. Moving on to our balance sheet, we ended the first quarter with $7.2 million in cash and cash equivalents compared to $8.8 million at December 31, 2012. Working capital was $25.6 million on March 31, 2013 and the current ratio was 3.6 to 1. Total shareholder equity was $44.5 million on March 31, 2013 up from $44.2 million at December 31, 2012. We had $0.4 million of cash flow from the operations during the three months ended March 31, 2013 compared to $0.4 million of cash inflow for operations for Q1, 2012. Before I look at our outlook, I will like to summarize a few key developments for ChinaNet in the past few months. First our, Super 8 International Limited subsidiary of Wyndham Worldwide, selected Liansuo.com, a subsidiary of ChinaNet to help expand its franchise outside the United States. Super 8 International Limited is one of the largest economy hotel operator in the world, operating more than 2,600 hotels worldwide, representing over 56,000 rooms in total. Liansuo.com will help Super 8 franchise hotel quickly expand its franchise footprint in Tier 1, Tier 2 as well as Tier 3 cities in China. ChinaNet received the awards of "The Most Leading Enterprise of Chinese Entrepreneurial Merchandising and Franchising Marketing Industry" as well, “The Most Trustworthy E-Commerce Platform in Entrepreneurial Merchandising and Franchising Industry" in China by the China Electronic Commerce Association. These awards are only awarded to one enterprise or one company in each industry. The Beijing Zhongguancun Enterprises Credit Promotion Association, ECPA completed a credit assessment for the Company. ChinaNet was awarded a high grade, which makes the Company eligible to receive future subsidies and fundings from the government State Development Bank, local governments and related entities. Liansuo.com, co-hosted the 19th Annual Beijing International Franchise Expo held at the Beijing National Agricultural Exhibition from April 5 to April 6, 2013. As the media co-host of this year's Franchise Expo, Liansuo.com ran promotions and publicity for the Franchise Expo, provided video interviews for the companies in attendance, offered project consulting services on site for entrepreneurs, and disseminated news reports after the exhibition. Flying Cloud plans to host 10,000 small media enterprise APP and Mobile sites for the customers. In addition, we expect to update our new products website in the first half of 2013. ChinaNet participated in the 14th Taiwan Franchise Expo held at Taipei World Trade Center from April 5 to April 7, 2013. In the process, the Company was able to learn what concerns and priorities franchise owners in Taiwan are considering in their evaluation of entering the mainland China market. And we have received a signal, it will be entering the China market very aggressively and their need of our services can be easily seen. Liansuo.com also signed an agreement with Mendale Textile Limited to help expand its franchise in China and internationally. Mendale has successfully expanded its owned and operated stores, as well as its franchise stores, across several provinces in China. Liansuo.com will provide online as well as mobile advertising and marketing to help Mendale further increase its brand recognition among consumers and entrepreneurs. Mendale right now is ranked at one of the top three textile manufacturers in China. Liansuo.com participated in the 2013 Chinese Franchise Expo held at China National Convention Center in Beijing from April 26 to April 28, 2013. As the strategic and also exclusive partner of the live webcast interview for this even, Liansuo.com invited various business leaders to share their valuable experiences in the franchise industry. So now for our outlook, China overall continued to transition from a high trade growth led primarily by infrastructure and real estate investment to a slower, more balanced growth trend laid by the consumers and businesses. While these provide a tremendous opportunity for China in the medium to long-term, we expect our core small medium business customers to take longer to adjust to the new economy. As such we expect more direct growth in our top and bottom line 2013 expectation. More specifically we expect to generate total revenue of $36 million and the net income of $1.2 million for the full year of 2013 in a fairly conservative basis and in which our R&D expenses were increased in large, in line with our strategy of moving into more social, local and more of server product structures and the potential partnership with our partners. Overall, this concludes my prepared remarks. We will now open the call to any questions you may have for the management team.

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from (inaudible). Please go ahead.

Unidentified Analyst

[Foreign Language] Hi George.

George K. Chu

Hi.

Unidentified Analyst

I have few questions, just one – maybe one by one. For your guidance, for the $36 million top line, how much of that is from TV advertising?

George K. Chu

Okay, sorry Cheng, can you repeat your question again.

Unidentified Analyst

[Foreign Language]

George K. Chu

Okay, good. Yeah, okay, thank you. So basically from the trends we expect almost 55% will be contributed by Internet and the TV will be somewhere around 40% to 45% and we do anticipate that Internet could be much higher growth in the second half of 2013, if that’s the case, we expect that out of the $36 million 60% will be contributed by Internet segmentation.

Unidentified Analyst

Okay, also you mentioned that your increase spending in research and development and that’s one of the reasons the earning guidance is $1.2 million, how much of spending you have planned for the R&D for the full year?

George K. Chu

Well, we have a budget right now. We expect to spend about $3 million to $4 million.

Unidentified Analyst

$3 million to $4 million for the whole year?

George K. Chu

So we are looking to spend at least about 10% to 15% of the total revenues.

Unidentified Analyst

Okay, thanks.

George K. Chu

Compared to the past it’s a very aggressive spending. As of now we have a very well established business model in mobile marketing and now we are going to invest more into that.

Unidentified Analyst

George K. Chu

Okay. Yeah, we have this unique business model. We haven’t seen anything similar. Well this is more or like cutting into the Chinese communities that will support our traditional mobile trends is more of the mobile campaign on their websites or content. That’s the very fundamental thing. But more or less, our step is to help the business to confirm their existing websites into a mobile site. That’s where it helps each business to automatically format their own APPs for their public – for their company participation. So we will soon launch these new services that’s under the Flying Cloud, we call it go touch. This is what we have to maintain 10,000 businesses, it will be very interested in using these businesses and we will charge a one-time fee, but for a long time, if they want customization, they have to pay extra and also after one year, if they want to continue hosting, then they have to continue to pay us.

Unidentified Analyst

George K. Chu

Correct.

Unidentified Analyst

And then you charge basically an upfront fee or later annual fee that’s a big business model?

George K. Chu

Correct, but the third unique part is that one June is actually I am not going to increase lot of labor because everything will be automatically down system once their content are entered. So it’s pretty itself what that self guided facts, so through the first steps, the user company just enter the content into the category they have sales categorized and then at the end of the process, this mobile website will be formed as well as the APP, the mobile application will be formed.

Unidentified Analyst

George K. Chu

Yeah, we have about 10 different templates for 10 different industry, but if a company say, hey I won’t pay you like RMB20,000 they want to do – I wanted something different and that’s absolutely yes.

Unidentified Analyst

Okay, thanks.

George K. Chu

Our key purpose is that we want a company to use it, it’s super user friendly environment. First of all, it won’t take too much of time, everything can be done in 5 to 10 minutes and done. So people won’t feel that it’s a great hassle to transition from the Internet PC site to the mobile site.

Unidentified Analyst

When are you saying that we’re – you will start doing this?

George K. Chu

We have it – the prototype is done already. So it’s already in testing and we are now formatting our marketing campaign and our marketing campaign will start within the first two weeks of June.

Unidentified Analyst

Okay. And so far how is your feedbacks from your customer side? I mean…

George K. Chu

Well, we have tried it on about 50 clients right now. We are now in a process to adjust the back-end management user interface. We want to make it more user friendly, and that the thing. Our overall it’s kind of an exciting thing for them to have.

Unidentified Analyst

Okay, thanks.

Operator

The next question comes from [Tony Young of Oriental Capital] Please go ahead.

Unidentified Analyst

Hi.

Handong Cheng

[Foreign Language]

Unidentified Analyst

I have follow up question to the first question regarding the revenue guidance. I just wanted to clarify, you mentioned for the $36 million, about $30 million will come from Internet advertisement, right?

George K. Chu

Not just $36 million – about $21 million to $22 million will be contributed by Internet and the other $13 million to $14 million will be contributed by TV.

Unidentified Analyst

Okay. So you said the overall guidance you think is very, very conservative and the up-tick it could come from the Internet part of business, right?

George K. Chu

Absolutely.

Unidentified Analyst

And you said it goes up to 60% from the Internet?

George K. Chu

What I mean is that, well I mean, out of the $36 million, about 65% to 60% will be contributed by Internet, but if $36 million increased to $40 million of this increase by $4 million. This $4 million will be mainly contributed by our Internet businesses.

Unidentified Analyst

I got you, all right. Thanks.

Operator

(Operator Instructions) The next question comes from (inaudible), a Private Investor. Please go ahead.

Unidentified Analyst

Yes, I think a few months ago you mentioned you had the mobile apps with Baidu and I think you even mentioned kind of mobile probably in November. Do you have an update for that? Is that still legitimate?

George K. Chu

,:

Unidentified Analyst

Okay, and then when do you expect to – you expect the cloud part of the cloud service to be implemented by the end of June?

George K. Chu

Yes, we will be updating because basically we are really adjusting. We have really reduced the scope of our Flying Cloud product cycle as wells as the product category. We are being more specific and more precise and also quite into the – what we call the formal service and product infrastructure, but this update will be completed by the end of June. So we – at that time we will do a press release.

Unidentified Analyst

Okay, just one last question, you mentioned that you were already into a higher grade. I was wondering will you ever get to a point where you will report your 10-Q on time?

George K. Chu

Unidentified Analyst

Okay, have you made any progress in accounts receivable collections?

George K. Chu

Yes, we are. As of right now, we are receiving and we expect that by the end of June, we should be able to sell at least 30% to 40% from our accounts receivables.

Unidentified Analyst

And so by the end of June, you should be able to do what?

George K. Chu

To collect 30% to 40% of my accounts receivables.

Unidentified Analyst

Okay, thank you.

George K. Chu

We are going for proactively on accounts receivable. That’s something I can promise you, because it is something the home engine still comes with us.

Operator

The next question comes from Gary Kristen, a Private Investor. Please go ahead.

Unidentified Analyst

Can you give an update on your plans for share buyback?

George K. Chu

Yes. Basically, we are setting up the plan right now with UBS and I don’t know how much detail I can disclose right now. Yeah, formatting the plan with my lawyer right now and we have about 15 to I think 15 to 20 days window to set up this plan. So what this has done and then what it just got automatically. So we won’t be able – it will just do itself. So we won’t be able to find it by any open window kind of thing.

Unidentified Analyst

Okay, thank you.

George K. Chu

Yeah, of course we don’t have any open window between our last quarter – I mean the year we pulled out throughout this quarter. So, between the period, it’s impossible for us to stay out of the plan.

Unidentified Analyst

All right.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to George Chu for any closing remarks.

George K. Chu

Well, thank you everyone for attending our first quarter results 2013 and I appreciate your support and the management striving hard to work on the business as well as to grow the businesses. And for the year, I’m sure that we will bring up more exciting news to our supportive shareholders. Thank you, and thank you very much.

Operator

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