ChinaNet (CNET) Reports 4Q Loss $0.50 on Revenues of $15.3M

ChinaNet-Online Holdings, Inc. (NASDQ: CNET) today announced its unaudited financial results for the fourth quarter of 2017 and audited financial results for the full year of 2017.

Fourth Quarter 2017 Highlights

• Net revenues increased by 64.1% to $15.3 million from $9.4 million in the corresponding period of 2016.
• Revenues from search engine marketing and data service increased by 121.1% to $13.1 million from $5.9 million in the corresponding period of 2016.
• Total operating expenses as a percentage of total revenue decreased to 40.7% from 42.9% in the corresponding period of 2016.

Full Year 2017 Highlights

• Net revenues increased by 34.2% to $46.6 million from $34.8 million in 2016.
• Revenues from search engine marketing and data service increased by 111.9% to $37.4 from $17.6 million in 2016.
• Total operating expenses as a percentage of total revenue decreased to 30.1% from 40.0% in 2016.

Mr. Handong Cheng, Chairman, President and Chief Executive Officer of CNET, stated, “2017 has been a transitional year for us. Realizing that our small-to-medium enterprise or SME customers are struggling as the Chinese economy slows down, we have actively migrated our business focus towards servicing larger customers and providing search-engine advertising solutions. As a result, we achieved 64.1% of year-over-year revenue growth in the fourth quarter of 2017 and 34.2% in full year 2017.”

“At the same time, we see tremendous opportunities in applying block chain technology to helping SMEs to achieve better business results than ever before. To seize the new opportunities, we have taken active steps to establish a complete ecosystem with transaction capabilities that can help our SME clients to target, acquire, and retain end consumers. With favorable government policies, block chain technology is being rapidly recognized and accepted in China. We believe that we can leverage block chain’s decentralized systems, distributed ledgers, immutable record, consensus protocol and provenance of assets to provide reliable and verifiable transaction services to our clients with higher security and protection than ever before.”

“We recently announced a strategic partnership with Wuxi Jingtum Network Technology to jointly develop our block chain technology. As we further enhance our block chain capabilities, we will provide our shareholders relevant updates regarding the strategies and applications of our block chain technology. We will remain focused on establishing and improving our close-loop B2B2C ecosystem with our block chain technology as its foundation. We are confident that we have the right strategy and team in place to secure a market leading position in China.”

Mr. Zhige Zhang, Chief Financial Officer of CNET, stated, “We are pleased to report another quarter of solid topline performance rounding out a strong year of 2017. For the fourth quarter and full year of 2017, our total revenues grew by 64.1% and 34.2% year over year, respectively. At the same time, we also continued to execute our cost control initiatives which resulted in reductions in our total operating expenses in 2017. Our sales and marketing, general and administrative, and research and development expenses for the full year decreased by 32.9%, 2.7%, and 36.8% year over year, respectively. Recently in January 2018, we successfully raised $11.0 million of capital through an equity offering, thus providing the necessary foundation for future development of block chain applications.”

Fourth Quarter 2017 Financial Results

NET REVENUES Net revenues increased by 64.1% to $15.3 million in the fourth quarter of 2017 from $9.4 million in the corresponding period of 2016, primarily driven by the increase in search engine marketing and data service revenue.

Search engine marketing and data service revenue for the fourth quarter of 2017 increased by 121.1% to $13.1 million from $5.9 million in the corresponding period of 2016. The growth was primarily attributable to the rapid expansion of the Company’s search engine marketing client base as enterprises in China continued to migrate to search engine marketing from other advertising and marketing channels for its more direct results and higher return on investments.

COST OF REVENUES AND GROSS PROFIT Cost of revenues was $15.1 million in the fourth quarter of 2017, compared to $7.7 million in the corresponding period of 2016. The growth was primarily attributable to a significant increase in revenue contributions from search engine marketing and data service in the fourth quarter of 2017, which have higher resources costs as the Company has obtained marketing access to the most popular search engines, internet portals and mobile portals in China.

Gross profit in the fourth quarter of 2017, as a result of increased cost of revenues, was $0.3 million, compared to $1.6 million in the corresponding period of 2016.

OPERATING LOSSOperating expenses in the fourth quarter of 2017 was $6.2 million, compared to $4.0 million in the corresponding period of 2016. As a percentage of total revenues, operating expenses decreased to 40.7% from 42.9% in the corresponding period of 2016.

Sales and marketing expenses in the fourth quarter of 2017 decreased by 66.7% to $0.3 million from $1.0 million in the corresponding period of 2016. As a percentage of total revenues, sales and marketing expenses decreased to 2.2% from 10.7% in the corresponding period of 2016. The decrease was primarily attributable to the successful execution of the Company’s cost control initiatives which resulted in a reduction in the headcount and staff salaries of the Company’s sales and marketing departments as well as lower advertising expenses in the fourth quarter of 2017.

General and administrative expenses in the fourth quarter of 2017 increased by 28.7% to $3.1 million from $2.4 million in the corresponding period of 2016. The growth in general and administrative expenses was primarily due to a $1.4 million increase in share-based compensation in the fourth quarter of 2017, which was partially offset by reductions in the Company’s bad debt expenses, office rental expenses, staff salaries and other administrative expenses. As a percentage of total revenues, general and administrative expenses decreased to 20.0% from 25.4% in the corresponding period of 2016.

Research and development expenses in the fourth quarter of 2017 decreased by 46.6% to $0.2 million from $0.5 million in the corresponding period of 2016. As a percentage of total revenues, research and development expenses decreased to 1.6% from 5.0% in the corresponding period of 2016. The decrease was due to reduced headcount in the Company’s research and development department and its efforts to further optimize its cost and expense structures in the fourth quarter of 2017.

Impairment on long-term investments in the fourth quarter of 2017 was $44.0 thousand, compared to $159.0 thousand in the corresponding period of 2016.

In the fourth quarter of 2017, the Company incurred $2.6 million of impairment of intangible assets, as the Company realigned its growth strategies, transformed its business structures, and re-assessed the values of its past acquisitions.

Operating loss in the fourth quarter of 2017 was $6.0 million, compared to $2.4 million in the corresponding period of 2016.

NET LOSSNet loss attributable to ChinaNet Online Holdings, Inc. was $6.2 million in the fourth quarter of 2017, compared to $2.3 million in the corresponding period of 2016.

BALANCE SHEETAs of December 31, 2017, the Company had cash and cash equivalents of $3.0 million, consistent with the corresponding period of 2016. Advances from customers was $3.6 million at the end of 2017, up 150.6% from $1.4 million at the end of 2016.

Full Year 2017 Financial ResultsFor the full year of 2017, total revenues increased by 34.2% to $46.6 million from $34.8 million in 2016, primarily driven by a 111.9% year-over-year increase in search engine marketing and data services.

Gross profit for the full year of 2017 was $4.6 million, compared to $7.8 million in 2016. The decrease was primarily due to an increased revenue contribution from search engine marketing and data service in 2017, which has a relatively lower profit margin.

Operating expenses for the full year of 2017 increased slightly to $14.1 million from $13.9 million in the 2016. The increase was primarily due to a $2.6 million impairment of intangible assets that the Company incurred in 2017. As a percentage of total revenues, operating expenses for the full year of 2017 was 30.1%, compared to 40.0% in 2016.

Sales and marketing expenses for the full year of 2017 decreased by 32.9% to $2.7 million from $4.1 million in 2016. General and administrative expenses for the full year of 2017 decreased by 2.7% to $7.5 million from $7.7 million in 2016. Research and development expenses for the full year of 2017 decreased by 36.8% to $1.3 million from $2.0 million in 2016. The decrease in operating expenses were mainly due to the Company’s effort to optimize its cost and expense structures.

Net loss attributable to ChinaNet Online Holdings, Inc. for the full year of 2017 was $10.1 million, compared to $6.5 million in 2016.

Recent DevelopmentOn January 17, 2018, the Company closed a registered direct offering raising approximately $11 million from selling its common stock at a price of $5.15 per share. After deducting offering expenses, the net proceeds will be used for general working capital purposes.

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