BEIJING, Nov. 16, 2010 (GLOBE NEWSWIRE) -- ChinaNet Online Holdings, Inc. ("ChinaNet") (Nasdaq:CNET), a leading full-service media development and internet technology company for small and medium-sized enterprises (SMEs) in the People's Republic of China ("China"), today announced its third quarter 2010 financial results.
Summary Financials
(1) Non-GAAP net income and EPS excludes non-cash loss related to changes in fair value of warrants for the three month period ended September 30, 2009 of $1.3 million.
Third Quarter 2010 Financial Results
Revenues for the third quarter of 2010 increased 9.5% to $8.9 million compared to $8.1 million for the third quarter of 2009. In concert with management's plan and focus for 2010, internet advertising increased 50.3% year-over-year to $7.1 million, and comprised 79.9% of total revenue. Growth was driven by focused marketing campaigns which resulting in net new customer additions, including new premium franchise customers, which was complemented by the sell through of additional web based services to the Company's installed customer base. Lower margin TV production and advertising service revenues declined 48.5% year-over-year to approximately $1.6 million or 18.0% of total revenues. As of September 30, 2010, the number of active customers for the Company's internet advertising business was 758 and during the third quarter, which was up 8% from previous quarter. The number of customers utilizing the TV advertising business was 148 and approximately 20% of these customers were serviced by both platforms.
"Our strong third quarter results demonstrate solid execution of our growth strategy and the inherent operating leverage in our business model," stated Mr. Handong Cheng, Chairman and CEO of the Company. "The strategic decision to focus more resources on 28.com is bearing fruit, and is responsible for expanding margins and accelerating earnings and cash flows. As we build our brand and introduce new services to monetize our installed customer base, we see substantial opportunities to further expand our footprint in the rapidly growing SME franchise market."
Cost of sales for the three months ended September 30, 2010 was approximately $3.1 million, down 22.8% due to a significant reduction in purchased television advertisement time from TV networks and local stations.
Gross profit for the third quarter of 2010 was $5.8 million, representing gross margin of 65.0%, compared to $4.1 million in gross profit and a gross margin of 50.4% in the third quarter of 2009. The meaningful year-over-year increase in gross margins was due largely to the Company's deliberate strategy to focus predominantly in its core internet service and advertising business, 28.com, which generate margins of 70%-80% compared to 5%-10% for its TV advertising business. Gross margins in internet advertising and TV were 76.9% and 9.4% during the third quarter of 2010, compared to 73.8% and 18.6% in the corresponding period last year, respectively.
Operating expenses for the three months ended September 30, 2010 were approximately $1.9 million, up 41.6% from the year ago period. Selling expenses for the period were $0.9 million, up 36.4% from $0.6 million from the third quarter of 2009 as the Company invested in new branding initiatives to drive new customer additions. Research and development expenses grew by 107.5% year-over to $0.3 million. ChinaNet accelerated spending to upgrade its advertising and internet management software platform. General and administrative expenses were $0.8 million and $0.3 million in the third quarter 2010 and 2009, respectively. Approximately $0.5 million of the increase was due to public company expenses.
Operating income for the third quarter of 2010 totaled $3.8 million, a 41% increase from the $2.7 million reported for the third quarter of 2009. Operating margins improved 940 basis points year-over-year to 42.7% during the third quarter; update accordingly.
GAAP net income for the third quarter was $3.8 million, an increase of 498.3% compared to $0.6 million reported in the same period of the prior year, while adjusted net income was $3.9 million and $1.9 million in each corresponding period. Adjusted diluted net income per share was $0.19 in the third quarter of 2010 compared to $0.11 in the same period in 2009, based on 20.9 million and 17.6 million outstanding shares, respectively.
Year-to-date 2010 Financial Results
(1) GAAP net income and GAAP EPS (Diluted) include a $1.9 million non-cash gain related to changes in fair value of warrants for YTD 2010 of $1.9 million and $1.3 million loss YTD 2009.
Revenues for the first nine months of 2010 increased 14.2% to $31.2 million compared to $27.3 million for the first nine month of 2009. Internet advertising increased 54.6% year-over-year to $19.5 million from $7.9, representing 62.5% of total revenue. TV advertising revenues fell 18.8% during the first nine month of 2010 to $11.0 million or 35.4% of total revenues. Management expects internet advertising to account for an increasingly larger percent of total sales going forward as it focuses the majority of its resources on growing 28.com.
Cost of sales for the nine months ended September 30, 2010 was approximately $15.8 million down 0.8% from the nine months ended September 30, 2009.
Year-to-date, gross profits increased of 35.1%, resulting in a gross margin of 49.3%. ChinaNet's internet advertising business generated gross profit margin of 74.8%, a 140 basis point improvement from the same period last year.
Operating expenses for the nine months ended September 30, 2010 were approximately $5.2 million, essentially flat compared to $5.1 million in the same period of 2009. Selling expenses for the period were $2.2 million, down 32.8% as a result of lower spending on TV advertising. Research and development costs were $0.6 million, or 1.9% of revenues compared to 1.3% in the prior year period.
Operating income for the first nine months of 2010 totaled approximately $10.2 million, up 62.7% from the $6.3 million reported for the first nine month of 2009. Operating margins were 32.7% and 22.9% for the first nine months of 2010 and 2009, respectively.
GAAP net income for the first nine months was $11.9 million, an increase of 267.6% compared to $3.2 million reported in the same period of the prior year. Adjusted for the non-cash items, net income was $10.0 million and EPS was $0.48 for the first nine months of 2010 as compared to $4.5 million net income and $0.30 diluted earnings per share in 2009, based on 20.9 million and 15.1 million outstanding shares, respectively.
Balance Sheet and Cash Flow
The Company had $22.2 million in cash and equivalents on September 30, 2010, compared to $13.9 million on December 31, 2009, working capital of $29.3 million, compared to $19.4 million, and a current ratio of 7.0 to 1 compared 4.9 to 1 on December 31, 2009. The Company generated $11.2 million in the first nine months of 2010 advancing 137.3% compared to $4.7 million in the same period last year. Accounts receivable were $4.5 million on September 30, 2010, up from to $3.2 million on December 31, 2009, with DSO's of 40 days compared to 20 days.
Guidance for 2010
Management reaffirmed 2010 net income guidance of $14.1 million, which represents 67.9% year-over-year growth, respectively. The Company is ahead of its target to decrease its television advertising and as such expects revenues to be between $41 and $43 million for 2010, compared to previous guidance of $45 million.
Business Updates
ChinaNet is focused on strategically expanding its rapidly growing internet service and advertising business, 28.com, which boasts gross margins of 70%-80%, compared to 5%-10% for its TV Advertising business segment. Two components of the Company's strategy uniquely positions ChinaNet to succeed: 1) an exclusive focus on the burgeoning Small and Medium Enterprises (SMEs) market with an emphasis on adding higher-paying branded clients and 2) introducing additional value added services to existing and new customers.
Internet Advertising -- During the third quarter of 2010, the Company's http://www.28.com web portal exchange further increased its estimated market share to more than 35% due to effective branding and marketing. ChinaNet continues to help SMEs increase the profile and value of their businesses through multi-media branding campaigns by integrating internet advertising with TV advertising. Its Internet Information Management (IIM) division was created in August 2009 to offer clients an intelligent software product based on its proprietary search engine optimization technology.
The Company started offering value added IIM services to existing clients, including search engine marketing, and search engine optimization in the third quarter of 2009. It has also offered add-on brand management services tailored for clients in various industries. Over the past year, 18% of clients have purchased add-on services from ChinaNet as adoption has accelerated. With revenues more than doubling in the first nine months of 2010, ancillary services currently represent approximately 30% (including management) of total internet advertising revenues in the small and medium sized franchise industry.
The Company introduced an online consulting service for franchisees during the third quarter, which provides another value added service and will drive more traffic to 28.com. With 75 total research and development staff added since the beginning of 2010, the Company is committed to developing technologies and services to further differentiate ChinaNet from its competitors.
ChinaNet participated in the 2010 Taipei International Chain and Franchise Autumn Exhibition in September to promote its brand to the over 200 franchise businesses in attendance. With thousands of SMEs in Taiwan looking to expand into China and vice versa, the Company sees tremendous long term growth potential. ChinaNet will initially offer a series of its premium services to franchise owners in Taiwan and expects to sign approximately 10 to 15 new international customers by the end of 2010.
Management is in the final stages of due diligence on several small acquisitions which include technology solutions and advertising service platforms. These opportunities are aimed at helping the company accelerate its IIM and online management tools, which will drive new franchisor additions while helping existing customers meet their expansion targets while providing a much broader spectrum of services to their franchisee base.
Conference Call
The conference call will take place at 8:00 am ET on Tuesday, November 16, 2010. Interested participants should call 1-877-941-1429 when calling within the United States or 1-480-629-9666 when calling internationally (passcode 4384506).
A playback will be available through November 23, 2010. To listen, please call 1-877-870-5176 within the United States or 1-858-384-5517 when calling internationally. Utilize the pass code 4384506 for the replay.
This call is being webcast by ViaVid Broadcasting and can be accessed by clicking on this link http://viavid.net/dce.aspx?sid=00007DD0, or visiting ViaVid's website at http://www.viavid.net , where the webcast can be accessed through November 23, 2010.
Non-GAAP reconciliation
About ChinaNet Online Holdings, Inc.
The Company, a parent company of ChinaNet Online Media Group Ltd., incorporated in the BVI ("ChinaNet" or "Zhong Wang Zai Xian"), is a leading full-service media development, advertising and communications company for small and medium companies (SME) in China. The Company, through its certain contractual arrangements with operating companies in the PRC, provides Internet advertising and other services for Chinese SMEs via its portal website 28.com, TV commercials and program production via China-Net TV, and in-house LCD advertising on banking kiosks targeting Chinese banking patrons. Website: http://www.chinanet-online.com .
Safe Harbor
This release contains certain "forward-looking statements" relating to the business of ChinaNet Online Holdings, Inc., which can be identified by the use of forward-looking terminology such as "believes," "expects," "anticipates," "estimates" or similar expressions. Such forward-looking statements involve known and unknown risks and uncertainties, including business uncertainties relating to government regulation of our industry, market demand, reliance on key personnel, future capital requirements, competition in general and other factors that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected. Certain of these risks and uncertainties are or will be described in greater detail in our filings with the Securities and Exchange Commission. These forward-looking statements are based on ChinaNet's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting ChinaNet will be those anticipated by ChinaNet. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the control of the Company) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. ChinaNet undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
About Non-GAAP Financial Measures
To supplement our consolidated financial statements, which statements are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: adjusted net income and adjusted EPS (basic and diluted). The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. Our management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our "recurring core business operating results." We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.
CONTACT: HC International, Inc. Ted Haberfield, Executive VP +1-760-755-2716 thaberfield@hcinternational.net