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Yintech Investment Holdings Limited (NASDAQ:YIN)
Q2 2018 Earnings Conference Call
Aug. 24, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Yintech Second quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions)

I would now like over to turn the conference over to Rene Vanguestaine with Christensen IR. Please go ahead.

Rene Vanguestaine -- Investor Relations

Thank you, William, and welcome all of you to Yintech's second quarter 2018 earnings conference call. Our earnings release was released earlier today and is now available on our IR website. On the call today from Yintech are Mr. Wenbin Chen, Chairman and CEO; and Ms. Yvonne Young, Investor Relations Director.

Mr. Chen will review business operations and company highlights followed by Yvonne, who will go over the financials and guidance on behalf of Mr. Chen. They will both be available to answer your questions during the Q&A session that follows. Questions can be asked in English or Chinese. If you ask your question in Chinese, please translate it into English yourself afterwards.

Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties, and factors that may cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties, or factors is included in Yintech's filings with the US Securities and Exchange Commission. Yintech doesn't undertake any obligation to update any forward-looking statement except as required under applicable law.

During this call, we will be referring to several non-GAAP financial measures, as supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with US GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

I will now turn the call over to Mr. Chen. Mr. Chen will give his remarks speech in Chinese and Yvonne will translate for him. Go ahead, Mr. Chen.

Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer, and Chief Financial Officer

[Foreign Language] Thank you, Rene, and thank you all for joining today's quarterly results earnings conference call.

[Foreign Language] Since the beginning of 2018, volatility has intensified in capital markets in China and policy-wise, during the period, the Chinese government implemented a series of regulatory reforms and used forbidden measures, especially targeting the financial industry. Overall, financial market conditions remained challenging throughout the first half.

[Foreign Language] The volatility in spot gold TD trading on the Shanghai Gold Exchange continued its downward trend starting in 2017 and reached its lowest level since 2005 during the second quarter. This continued to negatively impact customers' trading activities on our platform. As a result, net commissions from spot commodities trading decreased further from the previous quarter as we anticipated. We expect that the market environment for gold TD might persist in the second half of the year.

[Foreign Language] Despite the unfavorable market environment in spot commodities, we have delivered solid results in the second quarter. We have been steadfast in our efforts to diversifying our product offerings, in particular, in strengthening our presence in securities services for individual customers in China, which carry lower risk relative to the spot commodities to capture the higher growth potential on this front. Since we started this business in the second half of last year, it has grown explosively to become a major revenue engine.

[Foreign Language] As I mentioned on our Q1 earnings call, we expected this business to contribute more than 30% of our overall net commissions and fees. In the second quarter of 2018, I'm happy to report that it actually reached 40%, far exceeding our original target. With this, we have now delivered rapid growth for three consecutive quarters.

[Foreign Language] Revenues of commissions and fees from securities services grew from RMB13 million in Q4 2017 to RMB45 million in Q1 2018, and further to RMB87 million in Q2 2018, representing a Q-over-Q increase of 247% and 94%, respectively. We believe it's a testament to the initial success of our transitioning and a clear demonstration of our strong execution capabilities. We expect securities services to continue to expand steadily and become our second largest revenue driver after futures commodities.

[Foreign Language] To that effect, we introduced more securities services products to our customers by leveraging our core strengths in deep understanding of and extensive experience in serving Chinese individual investors, including the more than 550,000 customers we accumulated over the past few years. One of our focuses is securities investor advocation where we continued our emphasize on producing quality content and research to provide our customers with timely market information, comprehensive research analysis, and investment courses, specially designed for various levels of customer knowledge and experience.

[Foreign Language] recently launched a dialog with (inaudible) a subscription-based service through WeChat. It's a high-end TV video program jointly sponsored by Xinhuanet and Yintech, focusing on interview with recognized business and financial experts, leveraging the brand power of Xinhuanet and the expertise and reach of Yintech in personal financial services. Dialog with (inaudible) put together those top experts and scholars, well-known fund managers with outstanding investment track records, leading analysts from well-known securities firms offering high quality financial and business video content to provide investment wisdom to individual investors across various asset classes. It's also a platform for market experts and individual investors to interact and exchange ideas.

[Foreign Language] We believe this high-end and value-added program series will not only generate more revenue, but more importantly, enhance customers speaking [ph] needs. We'll continue to invest in designing more diversified and comprehensive online securities advisory courses at various price points to address different levels of needs based on each customer's financial knowledge and sophistication.

[Foreign Language] Now moving to our futures commodities business.

[Foreign Language] Since the second half of last year, we have entered into a transitioning period and actively explored new business growth engines to rapidly renew our business success. Since we launched this business in May 2017, we have experienced explosive growth to become our core business and largest revenue contributor. We are proud of our ability to foster our business recovery, thanks to the great team effort across many parts of the company.

[Foreign Language] In the meantime, we are cautiously expanding, making sure we are in full compliance with changing revelations in our futures commodities services. In the second quarter, we strategically slowed the growth of this business so we could deploy more internal resources and capital into securities services.

[Foreign Language] I believe one of our core competitiveness is our ability to swiftly shift business directions in response to dynamic market conditions and emerge to be a bigger and stronger player in the space at a faster pace than our peers.

[Foreign Language] We'll continue to deploy resources based on changes in market conditions. As far as we can see, our futures commodities business will grow further in the second half of the year.

[Foreign Language] As a technology-driven company focused on providing financial services, we have made significant progress and delivered strong results in offering our customers various securities information platforms.

[Foreign Language] We not only benefited from our own proprietary IT park platforms, but also partnered with other respective financial experts to deliver online courses on our platforms. In July 2017, we established Sina Shi Jin, our joint venture with SINA to focus on providing financial software information and services to individual investors seeking investments in securities, wealth management, futures, and gold products, leveraging SINA's brand recognition and tremendous user traffic as well as Yintech's leading position and professional expertise in offering investments and trading services for individual customers in China. Sina Shi Jin delivered rapid growth and contributed significantly to our securities services in the second quarter.

[Foreign Language] We expect that business along with other investor education and advisory services to grow healthily.

[Foreign Language] We also made good progress in our cooperation with Baidu Cloud to explore the application of artificial intelligence in financial industry. We are now in the process of finalizing the details of our cooperation.

[Foreign Language] The partnership with Baidu Cloud will enhance our existing CRM systems and create more value in the business areas such as marketing efficiency analysis, intelligent customer inquiry precising, 360 degree customer profiling, intelligent customer services, intelligent quality monitoring, and intelligent risk management. The adoption of big data and artificial intelligence will enable us to more efficiently allocate our marketing budget and more accurately identify potential customers with higher interest (inaudible) price to our product and service offerings.

[Foreign Language] Looking ahead, we will continue to focus on diversifying our product portfolios. We will maintain a high flexibility in deploying internal resources to capitalize on changing demand by offering diversified products. As a disciplined company, we adhere to maintain the highest operational and compliance standards and will continue to invest to ensure it remains so.

[Foreign Language] To stay on top of the new business environment, we have streamlined our organization to making more nimble, flexible and agile. We believe our innovative new products and our high standards of compliance will allow us to emerge a stronger, more diversified, and resilient company in the long run.

[Foreign Language] We expect our investments in promotional marketing campaigns during the first half of the year as well as our experience in developing new business to drive higher growth in the second half of the year. With that, we are confident that our commodity and securities services business will deliver faster growth in the second half of the year and that Yintech is confident to breakeven for the coming two quarters.

[Foreign Language] Lastly, I would like to take this opportunity to especially thank our investors, analysts for your consistent support and trust in us since our IPO and your belief that we can get through the challenges we face and succeed we did before. We believe that we will create more value for our shareholders through our persistent and continued dedication to our business development.

[Foreign Language] With that, I will now turn the call over to Yvonne Young, our Investor Relations Director to discuss our financial results during the second quarter of 2018 and outlook for the third quarter of 2018.

Yvonne Young -- Investor Relations Director

Thanks, Mr. Chen, and thank you all for joining today's earnings conference call. I will first walk you through our second quarter 2018 financial performance, followed by our guidance for the third quarter of 2018. Our total customer trading volume from commodities and securities services for the quarter was RMB409 billion, including RMB406 billion from commodities services, a 54% decrease compared to the second quarter of 2017 and 18% decrease compared to the previous quarter.

Revenues for the quarter were RMB263 million, a 54% decrease compared to the second quarter of 2017 and roughly flat compared to the previous quarter. The year-over-year decrease was mainly due to a decrease in commissions and fees from spot commodities services. The sequential decrease was mainly due to a decrease in net commissions and fees from spot and future commodities services, which was partially offset by an increase in net commissions and fees from securities services.

Our net commissions and fees for the quarter were RMB218 million, a decrease of 58% from the same quarter last year and a decrease of 10% from the previous quarter, primarily due to the reasons stated above. Starting from the second quarter of 2017, we began breaking down our net commissions and fees into two separate revenue segments, namely commodity services and securities services. Net commissions and the fees from commodities services for the quarter were RMB131 million, a decrease of 34% from the previous quarter, primarily due to a decrease in customer trading volume for commodities. Net commissions and fees from securities services for the quarter were RMB87 million, an increase of 94% from the previous quarter. Effective fee rate for the quarter was 0.03% compared with 0.04%, partially due to the decrease in customers' trading volume in commodities.

Expenses for the quarter were RMB315 million, a decrease of 29% from the same quarter last year and an increase of 2% from the previous quarter. The year-over-year decrease was mainly due to cost control measures implemented on advertising and promotion expenses as well as variable components of employee compensation and benefits. Net loss attributable to Yintech for the quarter was RMB45 million compared to net income of RMB85 million in the same quarter last year and net loss of RMB50 million in the previous quarter. Diluted loss per ADS for the quarter was RMB0.64 compared to diluted earnings per ADS of RMB1.16 in the same quarter last year and diluted loss per ADS of RMB0.69 in the previous quarter.

Our non-GAAP net loss attributable to Yintech for the quarter, which excludes the effect of share-based compensation and amortization of intangible assets in relation to the acquisition of Gold Master, net of tax effect, was RMB31 million compared to a net loss of RMB29 million from the same quarter last year and net income of RMB132 million from the previous quarter.

Non-GAAP diluted loss per ADS for the quarter was RMB0.41 compared with non-GAAP diluted earnings per ADS of RMB1.79 in the same quarter last year and non-GAAP diluted loss per ADS of RMB0.40 in the previous quarter. As of June 30, 2018, we had cash of RMB381 million [ph] and short-term investments, including available for sale investments and repurchase of government bonds of RMB1.3 billion compared with RMB527 million and RMB1.3 million as of March 31, 2018, respectively. As of June 30, 2018, total shareholders' equity was RMB3.385 billion compared with RMB3.6 billion as of March 31, 2018.

Now let me turn over -- turn to guidance for third quarter of 2018. Based on our current and preliminary views, in the third quarter of 2018, we expect revenues to be in the range of RMB260 million to RMB280 million.

This concludes my prepared remarks for today. Operator, we may now open the call to questions. Thank you.

Questions and Answers:

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions) And the first questioner today will be Johnny Wong with Jefferies. Please go ahead.

Johnny Wong -- Jefferies -- Analyst

Hi, thank you for taking my call, management. During the call, we mentioned that we will be breaking even for the next two quarters coming up. And given the fact that it seems that our effective commission rate has been coming down and our trading -- the active accounts are also coming down. Can you give us a little bit of color on how we will achieve this? And also, will we be cutting expenses, particularly the sales and marketing expense? Thank you very much.

Yvonne Young -- Investor Relations Director

Johnny, will you translate into Chinese or I do the translation from Mr. Chen.

Johnny Wong -- Jefferies -- Analyst

Did you want to do it?

Yvonne Young -- Investor Relations Director

No, let me do this.

Johnny Wong -- Jefferies -- Analyst

Okay. Thank you.

Yvonne Young -- Investor Relations Director

Okay, just hold on for a second. I translate for Mr. Chen first.

Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer, and Chief Financial Officer

[Foreign Language] Okay, thank you, Mr. Chen. Let me translate for the first question from Johnny first. There are two reasons that we are confident that we can -- achieving breaking even for the upcoming two quarters. The first one is, as I addressed in my script about macro environment, as I stated that in the first half of the year, the capital market in China continued to be under pressure and the A-share has been down over 10% in the first half and continued its downward pressure in the second quarter. So this is one reason that the spot market does not perform well. And second one is that the trade war between China and the US, that further decreased the trading confidence from Investors.

So overall, we see that the macro environment is very challenging in the first half of the year. And secondly, internally as those businesses in term of securities services and futures business, those are the new product and service lines we developed in the second half of the year. So we invested a lot of labor power and resources in developing this business. Since it is still in the nascent stage and we are not fully prepared or has substantial experience in operating this new business, so our operational efficiency is not as good as we expected. But into the second half, we have streamlined our business and restructured some of our business units and so that we can perform more flexible and in a more nimble business structure. So based on these two points, we are confident that we can deliver good results and can reach breaking even for the upcoming two quarters. And, Johnny, hopefully this answered your questions?

Johnny Wong -- Jefferies -- Analyst

Thank you.

Operator

And our next questioner today will be Tom Hamilton with Park Hill Capital. Please go ahead.

Tom Hamilton -- Park Hill Capital -- Analyst

Thank you management for taking my questions and also for, I guess, the strong performance in the second quarter given the challenging conditions. Since the business has been facing some difficulties, did you reduce headcount in the second quarter or in the first, whatever it's been, six weeks of the third quarter so far?

Yvonne Young -- Investor Relations Director

Thank you. Let me translate for Mr. Chen. [Foreign Language]

Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer, and Chief Financial Officer

[Foreign Language] Okay. Thank you, Mr. Chen, let me translate. Yes. So the simple answer to your question is that, yes, we do cut some headcounts. So our total headcount actually decreased in the second quarter compared to the first quarter and this is because, as I mentioned in the script, that we are streamlining our business and also restructured our business. And secondly, I want to highlight is that, we are not simply cutting the headcounts, but optimizing our current headcount structure. For example, in the first half, because we are entering into the new business and we still need to develop our expertise and build up our capabilities so that we are equivalent with (inaudible) and experience, enable us to kick up with development of the business involvement [ph].

So in the first half, while we don't think we are in a very good position, very good capability building to meet our business expansion requirement. But into the second half, after some test and experience and some license we learned, some experience we accumulated in the first half, we believe we are in a better position to optimize our labor power and to reach a better result in the second half. Thank you.

Tom Hamilton -- Park Hill Capital -- Analyst

Thank you.

Operator

And this will conclude our question-and-answer session. I would like to turn the conference back over to Yvonne Young for any closing remarks.

Yvonne Young -- Investor Relations Director

I think right now we hold for another second to see if any more question is coming.

Operator

(Operator Instructions) And the next question will be a follow-up from Johnny Wong with Jefferies. Please go ahead.

Johnny Wong -- Jefferies -- Analyst

Hi, sorry. I just want to clarify, can you give a little bit color as to the reason why our effective fee rate has dropped to 0.32%. This is lower than what it has been in prior years? Thank you.

Yvonne Young -- Investor Relations Director

[Foreign Language] Johnny, this is Yvonne. I'm going to answer this question on behalf of Mr. Chen. There are some couple of reasons that result in the decline of the effective fee rate. The first one is that, you see the commissions and the fees from commodity services has declined Q-over-Q. So obviously this will impact the effective fee rate. That's number one. Number two is, well, you cannot see this from our financial statement. If you look at our revenue breakdown, you will notice that other revenues has increased significantly in this quarter relatively to Q1 and Q2 last year. This is because that some of the revenues that we generated from our commodity services moving to other revenues because we charge our customers not only the commissions and fees, but also on our IT information platforms we offer to our customers, for those customers who traded on the futures companies, who traded at our futures companies. So we charge our futures companies the information platform service fees. So partial of the commissions and fees from commodities services actually goes to the other revenues. So that's one of the major reasons that costs declined as well.

Johnny Wong -- Jefferies -- Analyst

Okay, thank you.

Operator

And the next question will be a follow-up from Tom Hamilton with Park Hill Capital. Please go ahead.

Tom Hamilton -- Park Hill Capital -- Analyst

Thank you for taking my question. You made strong progress in your securities services business. Do you expect more progress on this in the second half? Can you give a bit more color on that?

Yvonne Young -- Investor Relations Director

Thank you. Let me translate for Mr. Chen. [Foreign Language]

Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer, and Chief Financial Officer

[Foreign Language] Thank you. Let me translate. Our securities services business is highly impacted by the overall financial capital market conditions. So as I addressed in my speech, in the first half, we are facing quite challenging overall market conditions. And if the situation continues into the second half, that will negatively impact our securities services business. So based on this conservative expectation that the situation will prolong to the second half, we expect our securities services business will grow steadily. But if the situation reversed and the market conditions change favorably and that will -- we expect that business will generate -- will deliver much higher growth.

Tom Hamilton -- Park Hill Capital -- Analyst

Great. Thank you.

Yvonne Young -- Investor Relations Director

Thank you.

Operator

(Operator Instructions)

Yvonne Young -- Investor Relations Director

I guess --

Operator

Okay, and there look to be no further questions, so I will pass the call back to Yvonne Young for any closing remarks.

Yvonne Young -- Investor Relations Director

Thank you, William. Thank you, everyone, for joining Yintech's Second Quarter 2018 Earnings Conference Call. And if you have any further questions, please feel free to reach out to me. And we thank you for your patience and your time to listening to our call. Thank you very much.

Operator

The conference has now concluded.

Yvonne Young -- Investor Relations Director

Operator, you may now disconnect.

Operator

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

Yvonne Young -- Investor Relations Director

Thank you.

Duration: 47 minutes

Call participants:

Rene Vanguestaine -- Investor Relations

Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer, and Chief Financial Officer

Yvonne Young -- Investor Relations Director

Johnny Wong -- Jefferies -- Analyst

Tom Hamilton -- Park Hill Capital -- Analyst

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