Waterdrop - Earnings Call - Q2 2025

Transcript

Speaker 0

... Good morning, everyone. This is Tracy Lee from Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop's second quarter 2025 earnings conference call. All participants are in listen-only mode in our English line. As a reminder, today's conference call is being recorded. Please note that discussion today will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risk and uncertainties that may cause the actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. The company does not undertake any obligation to update any forward-looking statement, except as required in applicable law. Also, this call includes discussion of certain non-GAAP measures.

Please refer to our earnings release for reconciliation between non-GAAP and GAAP. Joining us today on the call are Mr. Shen Peng, our founder, chairman, and CEO; Mr. Ran Wei, director and GM of insurance business; Mrs. Xu Xiaoying, Head of Finance Department; and Mrs. Jasmine Lee, Board Secretary. We'll be happy to take some questions in the moderated line at the end of the conference call. Good morning, everyone. This is Shen Peng. In the second quarter, we are pleased to see the integration of AI with the insurance and healthcare sectors beginning to deliver satisfying results. Revenue growth accelerated further, with quarterly revenue reaching CNY 840 million at 23.9% year-over-year.

Powered by AI, the companies improved operational efficiency significantly, driving an 85.9% year-on-year increase in operating profit and lifting the operating margin by 3.9 percentage points. Our InsurTech business leverages technological innovation to bring inclusive protection for more users. Our Waterdrop Guardian AI application suite has been rolled out across customer acquisition, sales, underwriting, customer service, quality assurance, and other key processes. With that, FYP in Q2 increased 80% year over year, and productivity per capita improved significantly. Waterdrop Medical Crowdfunding platform has also upgraded its risk assessment system by integrating large language model capabilities in case authenticity and transparency. As of June third, it has raised medical crowdfunding funds for 3.54 million patients.

With the market rebounding, the number of patients enrolled in our E-Find Patient Platform also reached a historical high, with nearly 1,000 patients enrolled in the second quarter of 2025, where operations remain robust and improving. We keep improving our AI technology stack. Our self-developed Multi-Agent Collaboration Framework can be reused a lot to help us quickly build different types of agent chatbots and let AI agents collaborate within milliseconds. Thanks to this, we can provide more stable AI agents to handle more and more complex situations. We are also creating proxy reward models and a GRPO algorithm. This allows agents to break away from the fixed scripts and change their communication strategies according to what customers do. To fix the slow responding issue when making AI agent calls, we use a Distributed Key-Value Cache.

It significantly speed up the inference of the first token. As of June 30, the company has submitted 60 patent applications relating to large language models, with nine of them filed outside in international. Our AI-driven business innovations were recently included in Harvard Business School case collection, receiving recognition from the world-renowned academic institution. Based on these technologies, we will continue to expand the use of AI in our insurance and healthcare sectors, constantly creating value for our business and the industry. The company also actively engaged in social return initiatives. As of June 30, 2025, our Waterdrop Welfare platform has collaborated with 118 public charitable organizations. It has initiated over 15,500 public welfare projects.

In July, it participated in the relief efforts for the flood disaster in North China, providing assistance to the affected people through monetary and material donations. This year marks our ninth anniversary of the company's start. We are very grateful for the continuous support from our stakeholders and investors over time. The company has actively conducted share repurchase in the open market for four consecutive years. To keep repaying shareholders' trust, our board recently approved two new initiatives. On one hand, we are pleased to announce that our board has recently approved an enhanced cash dividend of $10.9 million, representing a 50% increase over the previous dividend. The dividend per ordinary shares was $0.003, and the dividend per ADS will be $0.03.

The board has also authorized a fifth annual share repurchase plan. Since our first share repurchase program was launched in 2021, we have repurchased approximately 55.7 million ADS for $109 million as of August 31, 2025. Looking ahead, we will build on the current performance and make further efforts to achieve the business goals for the year of 2025, and the medium and long-term business development, striving to create more value for our stakeholders. Next, I will now pass to Ran Wei to introduce the development of insurance business in Q2. Thank you, Shen Peng. In Q2, our insurance business delivered robust growth. The first year premium reaches CNY 3.2 billion, up 80.2% year over year, and 53.1% quarter over quarter.

Insurance-related revenue was about CNY 740 million, up 28.7% year over year and 12.2% quarter over quarter. Operating margin improved to 23.1%, up by near two percentage points year over year, driving our deeper AI integration. For short-term products, we increased the investment in customer acquisition and the technology, representing FYP to CNY 2.43 billion, 95% year over year, and 62.1% quarter over quarter. In customer acquisition, we continuously tap into AI capabilities, integrate, iterate on user outreach, and recommendation AI models, and drive continuous breakthrough in customer acquisition from a public domain. We are increasingly applying AI tools to enhance the production speed and the quantity of marketing materials to support front-end customer acquisition efforts.

At the same time, we use that AI to facilitate better conversion of different scenarios. For example, our new AI Pro insurance model on the app and the mini program use a large language model for real-time matching, and it converts nearly 50% better than the traditional advertisement flow. In the voice service scenario, AI medical insurance experts continue to improve efficiency. In Q2, it assisted in achieving a 155% increase in the scale of insurance premiums compared to the Q1, and plans to continue expanding in the second half of the year. In WeCom scenario, AI medical insurance experts launched as of end of March, and by June, lifted FYP per lead 58% compared to that in May. Products. We expanded our portfolio.

We have new long-term medical plans such as Changbao, Kanbingbao, Xingyibao, which requires no health declaration and guarantee renewal for five years. We also roll out Guominbao, a mid to high-end plan with zero deductible and nationwide eligibility. Version 6.0 of our maternity series, Jianhaoyun, the first in the market to accept expecting mothers with pre-existing conditions. Our products for people with pre-existing conditions contributing a quarterly premium of 300 million CNY, a year-on-year increase of 146.6%. In terms of long-term insurance, we actively explore the efficiency improvement of AI tools for online sales, consultants, and planners, which contributes to the long-term FYP reaching 770 million CNY. A year-on-year increase of 45.4% and sequential increase of 30.5%.

With the assistance of AI tools, the productivity of traditional online sales team has achieved a double-digit growth year on year and quarter on quarter, and Shenlanbao independently contributed FYP of CNY 210 million. We've given online sales consultants and planners an insurance product knowledge base query tool called Life Planner Copilot. It's based on large language model. The model base has information on about 7,000 insurance products. It helps consultants search for relevant insurance contract terms in real time. In total, it has handled 300,000 insurance product-related consultations. After months of internal testing, we launched the KeYi AI at the end of August. Think of it as an insurance focus of DeepSeek. It delivers expert underwriting answers for every insurance product with industry-leading accuracy.

And we plan to open the platform to our partners to accelerate AI adoption across the industry value chain. Besides tools for agents, we have launched an AI super pre-sales assistant on WeChat. It can receive customer consultation twenty-four seven. It can figure out what customer's insurance needs and their intention to buy insurance on its own, match suitable products based on customer's situations, and make an appointment with the most appropriate agent salesman for them. According to the data since its launch, the AI assistant is more efficient than human assistant and has effectively improved the team's work efficiency. On the supply side of long-term products, we keep pushing health insurance innovation.

We kept refining our tech in our critical illness, aligned with easy health declarations, and introduced the cost-effective Sally Official Series, Critical Illness Plan, and roll out a no health declaration, income protection insurance product. Besides, disability insurance cross over across CNY 100 million in quarterly FYP for the first time, and are scoring full a strong user satisfaction. Since its rollout at the end of March, our AI customer service agent has scaled rapidly, and AI voice support alongside text. In June alone, it handled 250,000 service sessions, lifting first contact resolution rate. Online insurers now achieve a 100% AI coverage. Meanwhile, in Q2, our AI quality control assistant boost the Q&A efficiency by 99.4% compared with traditional manual way. This concludes the insurance business update.

Now I will hand over to our board secretary, Jasmine, to review our Q2 progress in Waterdrop crowdfunding and healthcare sector. Thank you, Hemingway. As of the end of June 2025, around 480 million people cumulatively donated CNY 70 billion to about 3.54 million patients through our Waterdrop Medical Crowdfunding platform. Guided by technical group, we increased R&D investment on our personal medical crowdfunding risk controls. For case-level risk, large language model metrics can now identify 15 high-risk scenarios, like suspected identities or abnormal spending or ethical violations. It does this by analyzing every word in the campaign's context, comments, and hidden clues, which greatly improves detection accuracy. For fund-level risk, a dynamic monitoring algorithm checks the diagnosis, timeline, commercial insurance payouts, and the fundraising speed.

If any anything wrong with fund, it will automatically limit or pause the campaign. Then manual review will be carried out within minutes. To address malicious promotion activities, we have developed an abnormal behavior recognition model. We incorporated crucial factors such as donation conversion rate, information dissemination patterns, and fraud characteristics. This model shows the top accuracy in the industry. This model can detect and stop the malicious campaign in real time. On May 27, we partnered with Guangzhou Civil Affairs Bureau to launch the Waterdrop Co-Health. It is the first project under our new designation as a government-endorsed platform that integrates social and public welfare resources. This program ensures that welfare resources can accurately reach the target population by integrating the system with Suishenban platform.

At the same time, in places like Guangzhou Waterdrop Co-Health Space and Hospital, the platform keeps improving its serviceability and actively respond to and explore the government-enterprise collaboration innovation model. Turning to our healthcare business, we continue to advance on steady and upward trajectory. Digital clinical trial business has entered a phase of rapid scale up, coupled with efficiency gains. E-Find Patient Platform expanded its collaboration to 198 pharmaceutical and contract research organizations. Meanwhile, we initiated service for 114 new programs. The number of patients enrolled also reached a historic high, with 999 patients enrolled in Q2 of 2025, representing a 34.2% year-over-year revenue growth. Our digital omni-channel marketing business also accelerated. We renew our three-year contract with a leading global multinational pharmaceutical.

Through the application of AI in patient services and health education management, we achieved a 105% increase in productivity per capita, representing a substantial enhancement in our service capability. Looking ahead, we will deepen our RDM capabilities and algorithmic position to unlock further growth as healthcare digitalization celebrates. Now I will hand over to Xu Xiaoying, our Head of Finance Department, to discuss our financial performance in this quarter. Thank you, Xiaoying. Thank you, Jasmine. Hello, everyone. I will now walk you through our financial highlights for the second quarter of 2025.

Before I go into details, please be reminded that numbers, all numbers quoted here will be in RMB, and please refer to our earnings release for detailed information on our financial performance on both the year-over-year and quarter-over-quarter basis, respectively. On the basis of steady growth in the previous quarter, the company has further achieved significant year-on-year and quarter-on-quarter growth in both revenue and profit this quarter. As Shen Peng and Ran Wei just mentioned, the further development of the company's AI application will improve the efficiency of our business operation in multiple aspects, including customer acquisition, sales, service, and quality control, providing strong motivation for the performance growth in the second quarter. In Q2, Waterdrop achieved a remarkable financial results with both, the...

With a total revenue amounted to CNY 838 million, representing a year-on-year increase of 23.9% and a quarter-on-quarter increase of 11.2%. By segment, the insurance business contributed CNY 739 million, showing a year-on-year increase of 28.7%. The core funding service fees generated sixty-seven point four million yuan, remaining stable on year-on-year. The digital clinical trial solutions used CNY 27.7 million, with a year-on-year increase of 34.2%. Meanwhile, the company has been making its operation more efficient. In second quarter, the total operating costs and expenses were around CNY 741 million, which is about 18.7% higher than the same period last year, as the growth rate of the cost and expenses was lower than that of the revenue.

This quarter, the operating cost was CNY 416 million, a 30.5% increase from last year. This was mainly because the cost of referral and service fee were went up by about CNY 73.4 million this quarter. Also, during this quarter, the company made additional efforts in a medical referral business to assist, help more patients. Moreover, as the company has been enhancing its AI capability to attract more users during this quarter, it acquired users while considering both efficiency and user experience. The sales and marketing expenses amounted to CNY 199 million, representing a 26.3% increase compared to last year. This is primarily due to an increase of CNY 44.3 million in marketing expenses for third-party traffic channels.

General and administrative expenses decreased by 21.9% year-over-year to 73.4 million CNY for the second quarter of 2025. This was primarily because the company tightened its operational control, and the allowance for credit losses was 13.4 million CNY less than the last year. The R&D expenses were 51.9 million CNY, remaining stable for the same period of last year. In the future, we will continue to pool resources to adjust the internal structure of R&D expenses and allocate more resources to the AI capability building. In terms of the operating profit, in Q2, the company's operating profit reached 97 million CNY, showing a high-speed year-over-year growth of 85.9%. The operating profit margins of the company as a whole and its insurance business have both further improved.

Net profit attributed to the company's ordinary shareholders reached CNY 140 million, up 58.7% year over year. As of 30 June 2025, we held CNY 3.4 million in cash reserves, with operating cash flow remaining positive. Operating cash flow remained positive, providing solid foundation for continued growth and strategic investment. In conclusion, Waterdrop's excellent performance in this quarter further demonstrates its robust operational stability and the effective synergy among its diverse business segments. Looking ahead, we will continue to leverage technology and AI to expand our user base. At the same time, we will optimize our operations to enhance efficiency, thereby facilitating the stable growth of business revenue and profits. Additionally, we will persist in creating long-term value for shareholders and society. Ladies and gentlemen, with that, we will conclude today's conference call.

We do thank you for joining. Have a good time.