Waterdrop - Q3 2023

Transcript

Tracy Li (Head of Investor Relations)

Good morning, everyone. This is Tracy Li from Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop's third quarter 2023 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 risks and uncertainties that may cause 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. Peng Shen, our Founder, Chairman, and CEO, Mr. Guang Yang, Co-Founder, Director, Finance VP, and GM of International Business; Mr. Zhu Zetao, GM of crowdfunding and PharmTech Business; Mr. Chen Ruichen, Board Secretary, and I will be happy to take some of the questions in the Mandarin line at the end of the conference call.

Peng Shen (Founder, Chairman, and CEO)

Hello, everyone. This is Peng Shen. Thank you for joining our third quarter 2023 earnings conference call. This quarter, the domestic economy in China is still in the recovery process. Various factors, including adjustments in product policies, have temporarily impacted the life insurance business. With the improvement in industry transparency and standardization, coupled with good gradual acceptance of new product policy in the market, the company believes that the life insurance industry is entering a new development stage, facing both opportunities and challenges.

The company actively responds to regulatory direction, striving to enhance business health and efficiency. Prioritizing user satisfaction, the company leverage its key insight into user needs to solidify user service and product innovation stability, embracing industry change with an efficient and dynamic approach. In the third quarter, the company continued to focus on creating value for users, achieving a resilient financial performance with approximately CNY 6.9 billion in the revenue. Maintaining a profitable trend for the past seven quarters, GAAP profit reached CNY 36.3 million, showing a QoQ growth of 60.7%-67%, and demonstrating the sustainable and high-quality development. With sustainable net profit and positive operating cash flow at the end of September, in the context of continuously share repurchase and acquisition of Shenlanbao, the company still maintain a robust cash reserve and the ability to organic growth.

The combined cash, cash equivalents, and short-term investments are about CNY 3.1 billion, providing flexibility and stability for the company to navigate uncertainties and support long-term growth. All business, business models of the company performed well in the third quarter, consolidating our leading position in the industry. Quickly, Waterdrop Insurance Marketplace focused on enhancing business health, optimizing the product matrix through excellent demand insight and the quality improvement, and it continued to contribute stable net profits. Secondly, our Waterdrop Medical Crowdfunding platform continued to improve our service and the risk control mechanism, accumulatively serving over 3 million patients, emphasizing fund transparency and credibility, actively demonstrating the company's commitment to authenticity. The company adhere to be user-centric, consistently enhancing service quality and advocating for the transformation of service-oriented consultants with the principle of users first, service the most.

In terms of digital clinical trial solution business, the E-Find Platform continued to deepen the collaboration with a well-known domestic and international pharmaceuticals, expanding the range of recruited disease types. Leveraging technological advantages, we continue to explore innovative opportunities in pharmaceutical field. In addition, we continued investing R&D to empower business, development. In the third quarter, the company iterated and upgraded our AI technology across various aspects of the product, operations, and services. With the implementation of our technology, the company will also seek the export opportunity to entire industry. Meanwhile, the company continued to prioritize and enhance its ESG efforts, striving to fuel sustainable development of the company and society. Various initiatives related to environmental protection, employee rights, corporate governance, are simultaneously advancing.

In September, the company collaborated with IIGF to initiate the online insurance industry ESG white paper, contributing to the practice and development of ESG information disclosure for the industry. In addition to business development, the company actively fulfilled CSR. In August, due to the flood in Beijing, Waterdrop Public Welfare platform collaborated with well-known charitable foundations to assist the stricken area. The platform launched a special topic on our homepage, and we donated many supplies to the Beijing Youth Development Foundation. As of30 September 2023, the platform has collaborated with 112 public charitable organizations in areas such as serious illness assistance, emergency disaster relief, and education support, raising a total of over $1.3 billion, with over 70 million participants.

Leveraging our business and technology advantage, we actively participate in the construction of multi-level medical systems, implementing one-stop assistance tools such as halfway home and so on in many cities. In terms of share repurchase, as of 30 November 2023, the company has cumulatively repurchased about 38.5 million ADS from the open market, spending over $87.4 million. This reflects the company's strong confidence in its inner value and long-term sustainable development. The repurchased shares will continue to be used for ESOP to enhance internal dynamic and promote mutual growth with our employees. The above is a brief review of business performance in Q3. Although facing the challenging microenvironment, we stay fully confident in ourselves and the industry. Looking forward to the last quarter of this year, our strategies include, firstly, driven on by online and digital transformation.

The insurance business will continue to be user-centric, striving to achieve long-term, healthy and stable development. Meanwhile, we will continue to enhance team efficiency, consolidated by the business foundation, and provide users with professional and thoughtful service. Secondly, the crowd funding business will continue to adhere user first and iterate service model, leading the industry towards high quality development. We will also adhere to transparent operations and implement strict risk management while actively fulfilling their part. Thirdly, leveraging big data, the pharmaceutical business will continue to increase industry penetration globally in order to construct a long-term growth engine. Fourthly, the company will make use of its ample cash reserves and seek cooperation and investment opportunities around insurance and healthcare sectors.

Last but not least, the company will accelerating technology empowerment and enhance AI abilities to build core technology competitiveness, thereby supporting the implementation of long-term strategies and empower the industry. In summary, the company will continue to prioritize user value, focusing on high-quality development, and it will advancing business synergy and organic growth, constantly expanding business boundaries to better bring insurance and healthcare service to billions through technology. And next, I will pass to Ran Wei to introduce the development of our insurance business in this quarter.

Ran Wei (Director and General Manager of Insurance Business)

In the first three quarters, the growth rate of life insurance slowed down. Against the backdrop, the FYP reached CNY 16.95 billion in this quarter, with 38% long-term insurance proportion. Insurance-related income reached CNY 6.2 billion, and the operating profit reached CNY 1.5 billion. Among them, the FYP of short-term insurance business reached the CNY 10.5 billion.

During this quarter, the company actively utilized the AI technology to enhance user acquisition capabilities and the service quality. On the customer acquisition side, the number of new users increased by 20% YoY. The company actively developed the vertical GPT, using the large model to enhance content production capabilities, driving a significant increase in WeChat channel views, with a sequential growth of 16% in the following numbers. The company also continued to upgrade the intelligence dialogue chatbot, driving a sequential increase of 6% in the renewal rate for short-term insurance, and it's remaining about 90%. Long-term insurance business is further developed in the third quarter, achieving a FYP of CNY 640 million, an increase of 17% YoYand 9% QoQ.

The average premium per policy increased by 43% YoY and 4% sequentially. Brokerage income increased by 11% YoY and 18% sequentially. The company adheres to improving the capability of long-term insurance service team and continuously optimizing the service quality achieving a sequential increase of 23% in FYP of private domain operations. The platform's long-term insurance product offerings further expanded. The proportion of life insurance users increased sequentially, driving up an almost 2% increase in the first, first year renewal rate. In the third quarter, the company demonstrated resilience in developing new service models, like in our life planning segment, amid market with declining interest rates. The company continued to build content capabilities and online planning service around the combination of life planners and new insurance.

The team continued to grow, achieving a new monthly FYP record despite the challenging market conditions. In the online brokerage sector, the company continued to enhance the functionality of our app, advancing towards industry-leading tools. In this quarter, FYP of offline brokerage increased by 7% YoY, and the average productivity per capita improved by 16% YoY. Regarding Shenlanbao, Waterdrop Insurance Marketplace and Shenlanbao preliminarily explored business synergy, significantly enhancing content marketing capabilities. The monthly FYP of Shenlanbao posted a new high during this quarter. In Q3, the company optimized its insurance products to meet the rising demand. In the health insurance sector, the company introduced Waterdrop Outpatient and Emergency Insurance.

It is a groundbreaking product and is the first in industry that cover medical expenses in below secondary level community hospitals and township hospitals, which address the shortcomings of existing product in market. Targeting users with existing conditions, the company upgraded its service by introducing Waterdrop Ai You Cancer Recurrence Insurance. This product provides comprehensive coverage with high coverage amounts, offering flexible options for a wide range of users. Additionally, the company launched Waterdrop Blue Ocean No. Series Unit Insurance, further enhancing the experience for subhealth users. The company also respond to public product policy shifts in savings insurance by offering diverse options tailored to different segmental population and scenario. In Q3, Waterdrop continued to enhance its insurance technology capability, investing in large models and AI technology to empower our business and deliver high-quality insurance service.

The company utilized the algorithms and AI to automatically identify potential intentions in the pre-sale process, significantly improve efficiency by 20%. With the assistance of AI technology, salesmen were able to achieve more refined user segmentation, effectively engaged with our users. The company also launched large model technology to create an insurance assistant based on our Waterdrop insurance knowledge big data. This assistant can answer questions related to insurance application claims, coverage responsibilities, premiums, and so on, assisting our salesmen to, and promptly interacting to users' concerns. Additionally, the company successfully launched an intelligent copywriting assistant with content production capabilities to assist our salesmen in creating more accurate and professional personalized content. Since its launch, over 1,000 salesmen have utilized this tool, significantly improved our efficiency. The above was about insurance business performance in Q3.

Now, Xiaoying will introduce the progress of Waterdrop crowdfunding and digital clinical trial solutions.

Xiaoying Xu (Head of Finance)

Thank you, Ran Wei, As of the end of Q3, Waterdrop Medical Crowdfunding platform has accumulated 445 million donors, assisted over 3 million patients, and raised over CNY 61.3 billion. Both user numbers and fundraising amounts continue to grow. In Q3, Waterdrop Operating Transparency Committee further enhanced platform transparency. The platform revamped the fundraising information display page with four different models like information disclosure, platform verification, public confirmation, and fund disclosure. These provide a more comprehensive representation of key details. And to enhance consultant service, we conducted the first Waterdrop Consultant Service Month in August. We standardize our consulting operations with the release of service handbook and improve overall service quality and risk awareness.

As a result, overall user certification rose to 98%, and the NPS for Fundraiser increased from 55% to 70%. In Q3, we continued the transition to service-oriented consultants in 45 strategic hospitals nationwide. This approach received high praise from both hospitals and patients. The platform will further improve the efficiency of service-oriented consultants while maintaining service quality. We prioritize user experience, hosting the first donor and fundraiser open day in September with the theme Open and Transparency, Gathering Trust. The company CEO, Peng Shen, and myself, together with donors and fundraisers, to have deep communication on fundraising service experience, on transparency, and case authenticity. The company will continue to listen to user feedback, focus on technology innovation to enhance service efficiency and transparency. We'll honor the trust of every user.

Digital clinical trial solution business showed stable and healthy development in this quarter, with a quarterly revenue of about CNY 27.6 million, representing a YoY growth of 60.7%. During Q3, the E-Find Platform expanded its collaboration with over 135 pharmaceutical and CROs, signing over 90 new projects with a rapid expansion, benefiting its excellent ability of recruitment and top project management. Collaborations with leading MNCs really drove this quarter. The platform entered into an exclusive participant recruitment partnership with the largest clinical trial project with one of the world's top five MNCs. Additionally, supplier processes were initiated with two top five MNCs, with formal collaboration expected in Q4. The E-Find Platform continues to expand the application of cutting-edge technology to accelerating new drug development, leveraging big data and structured information from clinical trial projects.

The platform uses AI-driven matching system to enhance efficiency in connecting patients with suitable projects. In patient service, due to our wide service unit patient base, we have developed an efficient private domain platform about patient management and core expertise in medical service. The platform offers patient management and integrated service such as patient selection, medication management, medical service, innovative payment solutions, and data insight, and so on. Providing the digital marketing solution covers the entire product life cycle. In Q3, a formal collaboration has been commenced with a leading MNC focused on the health management of chronic disease patients. That's all. And now I pass to Guang Yang for the next part.

Guang Yang (Co-Founder and General Manager of Insurance Division)

Thanks, Xiaoying. Hello, everyone, I will now walk you through our financial highlights for the third quarter.

Before I go into details, please be reminded that all numbers quoted here will be in RMB, and please refer to our earnings release for the detailed information on our financial performance on both YoY and QoQ basis, respectively. In Q3, despite a unique period of product adjustment, the company demonstrated robust profitability. The company revenue was CNY 686 million, a slightly QoQ increase from CNY 679 million. For segment report, it is the first quarter that we started consolidating the financial results of Shenlanbao, and it reported the results under the insurance-related segment. Our insurance-related income was CNY 619 million, showing a 3.7% QoQ increase.

Consulting service fees were CNY 36 million due to clinical solution income, which was about CNY 27.6 million, with a remarkable 60.7% YoY growth. Operating costs and expenses increased by 7.6% YoY, decreased by 4.4% in QoQ. Operating costs decreased by 8.5% YoY to CNY 313 million, mainly due to, firstly, the CNY 19.5 million decrease in the cost of one-year health insurance coverage related to termination of mutual aid plan, which was occurred the same quarter last year. Second reason would be CNY 9.4 million decrease in cost of revenue and services. S&M expenses increased by 38%-36.1% YoY to CNY 187.7 million.

It was primarily due to, firstly, the consolidation of Shenlanbao, which generated S&M expense of CNY 28.1 million. Secondly, 14.4 million increase in marketing expenses to third-party traffic channels. And thirdly, 9.1 million increase in personal cost and share-based comprehensive expenses. In this quarter, the company proactively adjust certain advertising strategies. There was a 41.3 million major decrease in marketing expenses to third-party traffic channels, partially offset by the consolidation of Shenlanbao. S&M expenses decreased by 8.2% sequentially. G&A expenses increased by 39.7% YoY to CNY 114.6 million, and increased by 19.4% sequentially, both QoQ and YoY variance due to the consolidation of Shenlanbao and the increase in professional service fees.

R&D expenses decreased by 5.7% YoY to CNY 73.9 million. The decrease was primarily due to personal costs and share-based comprehensive expenses. Adjusted net profit attributed to the company in Q3 was CNY 74.8 million. The GAAP net profit was CNY 36.3 million, and we have generated net profit over the past seven quarters. As of the end of September 2023, the company had combined cash, cash equivalents, and short-term investments of CNY 3.1 billion, indicating sufficient cash reserves. Overall, the business performance in Q3 was stable. Looking ahead, we will continue to focus on user value and sustainable high-quality development.

Tracy Li (Head of Investor Relations)

Ladies and gentlemen, with that, we will conclude today's conference call.