ZW Data Action Technologies (NASDAQ:CNET) is an integrated online advertising, precision marketing, data analytics, and other value-added services provider serving enterprise clients in China. The company has navigated the dynamic digital advertising landscape, leveraging its technological expertise and deep industry knowledge to deliver comprehensive solutions to its clients.
Business Overview and History
ZW Data Action Technologies was incorporated in the State of Texas in April 2006 and later re-domiciled to become a Nevada corporation in October 2006. In June 2009, the company consummated a share exchange transaction with China Net Online Media Group Limited, a company organized under the laws of British Virgin Islands, which made China Net BVI a wholly-owned subsidiary of ZW Data Action. This transaction transformed the company into a holding company that, through certain contractual arrangements with operating companies in China, now engages in providing internet advertising, precision marketing, e-commerce online-to-offline (O2O) advertising and marketing services, as well as related data and technical services to small and medium enterprises (SMEs) in China.
Over the years, ZW Data Action has expanded its service offerings to include blockchain-enabled web/mobile applications and software-as-a-service (SaaS) solutions for its clients. The company's Omni-channel advertising and precision marketing platform, coupled with its data analytics capabilities, has allowed it to offer comprehensive solutions that cater to the evolving needs of its enterprise customers.
In 2018, the company faced a significant challenge when the Public Company Accounting Oversight Board (PCAOB) was unable to inspect the company's auditor in relation to their audit work performed for the company's financial statements. This issue deprived investors of the benefits of such inspections. However, this problem was resolved in 2022 when the PCAOB secured complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong.
During the early 2020s, ZW Data Action had to navigate an economic downturn in China, which led to decreases and delays in advertising spending. This negatively impacted the company's short-term ability to grow revenues. In response, the company implemented strategies to optimize its internet resources cost investment and strengthen its accounts receivables collection management to improve cash flows.
In 2022, ZW Data Action achieved a significant milestone by introducing its blockchain-based SaaS services to customers. This new offering leverages the company's self-developed Blockchain Integrated Framework (BIF) platform. While the profitability of this new business line has not yet met the company's expectations, it is anticipated to generate positive cash flow and improve the company's liquidity in the future.
Financial Performance
For the fiscal year ended December 31, 2023, ZW Data Action reported revenues of $30.59 million, a 16.6% increase from the prior year's $26.24 million. This growth was primarily driven by the company's main service revenue stream - the distribution of the right to use search engine marketing services. However, the company's net income for the year ended December 31, 2023, was a loss of $5.97 million, compared to a loss of $9.79 million in the previous year. The operating cash flow for 2023 was negative $2.01 million, and the free cash flow was negative $2.09 million.
For the nine months ended September 30, 2024, ZW Data Action reported revenues of $13.19 million, a significant decrease from the $25.32 million reported in the same period of the prior year. The company's net loss for the nine-month period was $2.99 million, compared to a net loss of $4.07 million in the corresponding period of 2023. In the most recent quarter (Q3 2024), revenue was $3.24 million, representing a 64.7% year-over-year decline, with a net loss of $1.91 million.
The decrease in revenue was primarily due to a decline in the company's core business of distributing the right to use search engine marketing services, as the company shifted its focus to improving profitability. Despite the revenue decline, ZW Data Action's gross margin improved to 3.5% in the first nine months of 2024, compared to a gross loss of 1.7% in the prior year period, as it focuses on optimizing its cost structure and product mix.
Liquidity
As of September 30, 2024, ZW Data Action had cash and cash equivalents of $1.12 million and working capital of $3.88 million, compared to $0.82 million and $4.11 million, respectively, as of December 31, 2023. The company's current ratio stood at 1.65, and its quick ratio was 1.20, indicating a relatively strong short-term liquidity position. As of December 31, 2023, the company's debt-to-equity ratio was -0.17.
To improve its liquidity, ZW Data Action plans to optimize its internet resources cost investment strategy, strengthen accounts receivable collection management, and negotiate more favorable payment terms with major suppliers. The company also intends to reduce operating costs through personnel optimization and office space downsizing, if necessary. Additionally, the company's new blockchain-based SaaS services are expected to generate positive cash flow and improve liquidity, as they leverage the company's self-developed software platform.
Product Segments and Services
ZW Data Action's core business is its internet advertising and related services segment, which accounted for 94.3% of total revenues for the nine months ended September 30, 2024. This segment primarily involves the distribution of the right to use search engine marketing services that the company purchases from major search engines and resells to its customers. ZW Data Action purchases these search engine marketing resources in bulk at discounted rates and then charges its clients the actual cost consumed plus a premium.
For the nine months ended September 30, 2024, revenues from the distribution of search engine marketing services was $9.74 million, representing 73.8% of total revenues. However, this revenue stream has been declining, down from $24.82 million in the same period last year, as the company shifts its focus to more profitable business lines.
In addition to the search engine marketing services, ZW Data Action also generates internet advertising revenues by providing online advertising placements on its own web portals. Revenues from this internet advertising and related data services was $2.70 million for the nine months ended September 30, 2024, up from $0.43 million in the prior year period. The increase was primarily driven by the company providing more influencer marketing services during the current period, which offer higher growth opportunities and profitability.
Starting in early 2022, ZW Data Action introduced blockchain-based SaaS services to its customers. These services leverage the company's self-developed Blockchain Integrated Framework (BIF) platform, allowing clients to utilize the BIF platform for enterprise management functions such as recording, sharing and storing data on the blockchain, as well as generating unique Non-Fungible Tokens (NFTs). For the nine months ended September 30, 2024, the company generated $0.75 million in revenues from its blockchain-based SaaS services, compared to $0.075 million in the prior year period.
Challenges and Risks
ZW Data Action has faced several challenges in recent years, including the impact of the COVID-19 pandemic on the advertising industry in China. The general economic downturn in the country led to decreases and delays in advertising spending, which negatively impacted the company's short-term revenue growth. While the Chinese government has introduced various stimulus measures to boost the economy, the future impact of the recent economic conditions remains uncertain.
Another key risk for ZW Data Action is the potential delisting of its common stock from the Nasdaq Capital Market due to the Holding Foreign Companies Accountable Act (HFCAA). In 2021, the company was identified as a "Commission-Identified Issuer" under the HFCAA, as the Public Company Accounting Oversight Board (PCAOB) was unable to inspect the company's auditor, which is located in Hong Kong. While the PCAOB has since secured complete access to inspect and investigate PCAOB-registered public accounting firms in China mainland and Hong Kong, there is no guarantee that this situation will remain stable in the future.
The company's exposure to the Chinese market and reliance on the performance of its VIEs and subsidiaries in China also present risks related to currency exchange restrictions, capital controls, and potential changes in the regulatory environment.
Recent Developments and Outlook
In September 2024, ZW Data Action announced a 1-for-4 reverse stock split of its common stock, effective September 30, 2024. This move was intended to regain compliance with the Nasdaq's minimum bid price requirement and maintain the company's listing on the exchange.
Despite the recent challenges, ZW Data Action remains focused on expanding its core internet advertising and marketing business through strategic acquisitions, as well as further developing its blockchain-based SaaS services. The company believes these initiatives, coupled with its cost optimization efforts, will help improve its profitability and liquidity in the long term.
The company has incurred operating losses and may continue to do so as it implements its future business plans. Management plans to optimize its internet resources cost investment strategy, improve accounts receivable collection, and reduce operating costs to improve liquidity and profitability. The company's ability to continue as a going concern is dependent on its ability to increase gross profit margin and reduce operating losses from its core business and/or obtain additional financing.
Conclusion
ZW Data Action Technologies has navigated the dynamic digital advertising landscape in China, leveraging its technological expertise and deep industry knowledge to deliver comprehensive solutions to its enterprise clients. While the company has faced recent challenges, including the impact of the COVID-19 pandemic and the risk of potential delisting, it remains committed to expanding its core business and diversifying its service offerings. By optimizing its operations and capitalizing on emerging opportunities in the digital advertising and SaaS sectors, ZW Data Action aims to drive long-term growth and enhance shareholder value.