Waterdrop - Earnings Call - Q3 2024

Transcript

Tracy Li (Head of Investor Relations)

Everyone, this is Tracy Li from Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop's Third Quarter 2024 earnings conference call. All participants are in a listening-only mode in our English line. As a reminder, today's conference is being recorded. Please note that this discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from our current expectations. Potential risk 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 by applicable law. Also, this call includes discussion of certain Non-GAAP matters. Please refer to our earnings release for a reconciliation between Non-GAAP and GAAP.

Joining us today on the call are Mr. Peng Shen, our founder, chairman, and CEO, Mr. Ran Wei, director and GM of the insurance business, Mrs. Xiaojiao Cui, head of the finance department, and Mrs. Stephanie Lee, board secretary. We will be happy to take some of your questions in the mandatory line at the end of the conference call.

Peng Sheng (Founder, CEO, and Chairman)

Hello everyone, this is Shen Peng. In Q3, the company remains committed to healthy operations and sustainable growth, delivering solid results. Total revenue for this quarter reached CNY 704 million, and net profit attributed to ordinary shareholders was around CNY 92.8 million, reflecting a year-over-year increase of over 150%. For the nine months of 2024, the company reported total revenue of CNY 2.08 billion, up 5.8% year-over-year, and net profit attributed to ordinary shareholders of CNY 260 million, a 142% increase compared to the last year.

Since Q1 of 2022, we have achieved profitability for 11 consecutive quarters. In Q3, each of our business segments focused on enhancing the value with key metrics showing steady growth. In the insurance business, we targeted seniors, mothers, and individuals with pre-existing conditions, expanding our network of insurers and launched several innovative products. First-year premiums totaled over CNY 2 billion, a significant increase year-on-year, with operating profit margin above 20%. In medical crowdfunding, we actively responded to new Charity Law and the requirements for administration as an online service platform for individuals seeking financial help. Both user numbers and corresponding amounts continued to rise, while the segment loss was further narrowed, reinforcing the sustainability of our operations. In the healthcare sector, our strong execution capabilities allow us to expand our network with some CROs, with the number of enrolled patients growing both year-on-year and quarter-over-quarter.

We're also delighted to report notable progress in AI. As a tech company rooted in insurance and healthcare, WaterDrop is on the forefront of integrating large language models into our industry. Following two years of focused development, we launched AI Top Sales Platform 3.0, a conversational AI platform that customizes AI sales agents for businesses. It features advanced AI capabilities of outbound calling and conversational interaction, capable of supporting a voice-based sales and customer service across various B2C industries, and helping our ecosystem partners enhance service quality and efficiency. Following our collaboration with P&C Insurers in Q2, the AI Top Sales 3.0 platform reached a new milestone in its commercialization this quarter. We expanded our partnership with more insurers and have initiated pilots with companies in non-insurance sectors, including e-commerce and education, where there is a high demand for large-scale customer service teams.

As of now, we have established collaboration intentions with 10 clients across various industries, with 8 already in the testing phase. This highlights the vast market potential for our sales agent solutions. Going forward, we will continue investing in R&D to build our next core competitive advantage around AI applications. We value the trust from our investors and prioritize shareholder returns. By the end of November 2024, the company has cumulatively purchased approximately 50.9 million ADS from the open market, totaling around $102 million. Moreover, we recently completed our second special cash dividend of approximately $7.3 million. For corporate social responsibility, as of the end of September, the Waterdrop Charity Platform has partnered with 115 public charitable organizations and launched over 15,000 charity projects.

During this quarter, we published our 2023 ESG report and co-authored the ESG white paper for the online insurance industry, with the International Institute of Green Finance (IIGF) offering valuable insight into the industry's ESG practice. Recently, the company received several appreciated awards, including the China ESG Connected Pioneer Award and China ESG Excellence Award, reflecting our commitment to ESG and our strong progress in this area. This concludes our update on business performance in Q3. Looking ahead, WaterDrop will continue to leverage technology, focusing on long-term high-quality and sustainable growth centered around user needs. As AI continues to transform more industries, our AI capabilities and its first-mover advantages in the large language models position us for greater opportunities and growth in the future. I will now pass to Ran Wei to discuss our insurance business in Q3. Thanks, Mr. Shen.

In Q3, the insurance business generated about CNY 2.04 billion in FIP, at 20.4% YOY and 14.8% quarter-over-quarter. Insurance-related income was about CNY 600 million, representing a decrease of 3% YOY and an increase of 4.7% quarter-over-quarter. Operating profit was around CNY 120 million, but operating profit margin was maintained at about 20%. During this quarter, our short-term insurance FIP hit CNY 1.37 billion, up 30.3% YOY and 9.9% quarter-over-quarter. The increase in premiums on new policies primarily drives the growth. The company reached out to new customers through multiple channels and methods, creating product IPs on platforms like Little Red Book, TikTok, and WeCom videos, collaborating with influencers, and further optimizing customer acquisition efficiency based on our RTA model. The number of new users in Q3 remained stable on quarter-over-quarter basis.

Taking existing users, the company is committed to improving user experience and iterating its insurance product offerings according to the needs of different user profiles, leading to an increase in premiums sequentially. For example, regarding inclusive insurance products, the company has launched several products that do not require health disclosure, have a zero deductible, and accept a pre-existing condition, thereby lowering our user barriers. Some products have added a special medical checkup service to enhance user protection. In Q3, the FIP of pre-existing condition insurance was nearly CNY 200 million. In terms of maternity insurance, the 3.0 version of Xiao Xing Cui's continued to gain user recognition, and the parent-child critical illness insurance has been successfully launched. Due to this combined effect, the average premiums for short-term medical insurance have increased 14.9% sequentially in Q3.

In September, we held the WaterDrop Insurance Service Ecosystem Conference, where we strategically partnered with several insurers to establish the triple-group service alliance, aiming to enhance the entire user experience. The FIP for long-term insurance in this quarter reached CNY 670 million, a year-on-year increase of 4.3%, and a quarter-on-quarter increase of 26.4%. The online sales team has been stepping in their game, stepping up their game, boosting efficiency and driving an increase of premiums per capita sequentially. The last final model, which is content-driven, has been a major player in the growth spurt, especially with the rising trend of annual payment products. On the supply side, we have been catering to the needs of seniors, strengthening ties with insurance companies, and broadening the scope and protection of our disability insurance offerings.

We rolled out new additions of our disability income loss insurance, which covers people from 19.7% and extended coverage up to 90%. This quarter, disability insurance brought in around CNY 78 million in FIP. Plus, together with our insurance partners, we have built an exclusive lucky star critical illness policy that covers 10 common brain conditions, giving comprehensive protection against brain health risks. On the service side, we continue to build up Waterdrop Premium Club membership system, covering over 30 benefits for our members, offering health management, medical express assessment, and high-end customized services such as wealth management, children's educational planning, and emergency assistance for both long-term and short-term insuring users, leading to an increase of renewal rates in the long-term products. Shenlanbao Insurance Sector has also shown strong growth in Q3, contributing CNY 260 million in FIP, with a significant increase in both year-on-year and quarter-on-quarter.

During this quarter, Shenlanbao further strengthened its planning partner team, leading to a further rise in premiums per capita. In Q3, Waterdrop Insurance Marketplace and Shenlanbao continued to deepen their collaborations in product and research development, leveraging the Waterdrop Guardian LLM to enhance content generation and customer service scenarios for Shenlanbao. In terms of offline workplace, Waterdrop Xingchen has announced a brand update upgrade, aiming to build a comprehensive service system that integrates insurance, healthcare, and legacy planning. Its initiative encompasses a range of services, including expanding product offerings, innovating service systems, and different mid-platform services, all designed to empower brokers in their transition. As for technology, the company continues to invest in insurance large language models. As of the end of September, the company has applied for over 40 patents related to LLMs, with six patents granted.

Firstly, to date, the knowledge base of our WaterDrop Guardian has covered over 7,000 mainstream insurance products. Since the beginning of this year, the company has developed several intelligent products based on this. Secondly, the quality inspection process has been revolutionized, due to our AI service quality agent, which has efficiently replaced the previous manual sampling method. By employing the AI preliminary check followed by human review, we have significantly boosted inspection efficiency, achieving full coverage in certain scenarios, and it's a process that orders at a pace that's 3.7 times faster than the conventional method, tangibly increasing our operational effectiveness. Thirdly, in the service scenario, WaterDrop Guardian has developed the conversational skills of how to simulate human interaction in insurance processes.

During this quarter, our AI agent further enhanced its technology capabilities, integrating the long-term narrative model and improving handling of low-quality response in daily conversations, addressing a long-tail issue. This is a summary of this quarter's insurance product performance. Next, Guang Yang will introduce the developments of our company's core funding and health-related business in Q3.

Guang Yang (VP, Director and General Manager)

Thanks, Mr. Ran. As of the end of Q3 2024, around 466 million people cumulatively donated CNY 66.3 billion to about 3.32 million patients through our WaterDrop medical co-funding. This quarter marks a significant milestone for our medical co-funding business and the industry as a whole.

Following the issuance of the Measures for administration of online service platform for individuals seeking health, released by the Ministry of Civil Affairs of the PRC and other government departments on September 5, 2024, this Measures outlines specific regulations on fee structures, fund management, and the fight against illegal activities, establishing a legal framework, and enhancing operational guidance and transparency in the crowdfunding industry. We understand that the credibility is the lifeblood of our platform. This quarter, we have been continually refining our risk control strategies to enhance transparency. For instance, by iterating our public supervision mechanism, we ensure that the verification and handling of the reported cases are clearly and promptly communicated on the platform, fostering a transparent and efficient oversight environment in cooperation with the public. At the same time, as a technology company, WaterDrop is continually exploring how technology can empower the platform.

For example, our co-funding system employs algorithms to deliver round-the-clock alerts for high-risk cases. The platform is equipped to recognize the response to high-risk situations in real time. Even outside of regular working hours like from 1:00 A.M. to 6:00 A.M. are taking immediate emergency measures, such as pausing crowdfunding cases and suspending payments, ensuring swift containment of any risky cases. At WaterDrop, we firmly believe in the positive power of technology. In the future, we will continue to protect every act of kindness through technological innovations and improve the risk control mechanism. In the healthcare-related business, this quarter, our health-related business maintained steady growth. For digital clinical trial solution business, our platform enrolled 909 new patients in Q3, adding to the cumulative total of over 9,500 since our launch, showing a consistent growth trajectory.

Building on excellent fulfillment and efficiency and quality, Yi Fan platform continues to expand and deepen its partnerships with leading pharmaceuticals, both domestically and internationally. In Q3, we collaborated with a total of 184 pharmaceuticals and CROs. During this quarter, the platform played key roles as a primary partner and even an exclusive recruitment partner in several projects. For instance, in a clinical trial for rare oncology targets as an exclusive recruitment partner for the top MNC, we leveraged precise analytics and intelligent matching of patients' medical records to help pharmaceuticals exceed their enrollment target. As the industry moves towards high-quality growth, top pharmaceuticals are embracing AI and big data in new drug development. Yi Fan platform, with its digital expertise, has been sharing insights with leading domestic and international pharmaceuticals, earning broad recognition. This has spurred the ongoing collaboration in new therapeutic areas.

In Q3, we signed 88 new projects. In the digital multi-channel marketing business, the platform has further integrated AI technology into various patient service stages. For example, in patient education and care, our AI assistants quickly attract the patients, delivering professional medical advice and improving service efficiency. For quality control, AI semantic analysis supplements manual checks, upholding service standards and professionalism. Plus, using structured medical data and large language models, we guide patients in follow-up, enhancing their disease management awareness and compliance. Looking ahead, the platform will continue to collaborate with industry partners to explore further applications and possibilities of AI technology in pharmaceutical scenarios, supporting the industry's digital transformation. Thanks for listening. I will now hand over to Xiaojiao Cui and Guang Yang to discuss our financial performance. Thank you, Xiaojiao. 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 participants will be on record. Please refer to our earnings release for detailed information on our financial performance on both the year-on-year and quarter-on-quarter basis, respectively. In Q3, the company continued to optimize financial performance, with notable growth in profitability. Our total revenue for this quarter was CNY 704 million, showing a moderate quarter-on-quarter growth of 4.1%. Breaking it down by business segment, the insurance business contributed approximately CNY 600 million in revenue, a quarter-on-quarter increase of 4.7%. The core funding segment generated service fees of around CNY 65.8 million, a quarter-on-quarter decrease of about 5%. Digital clinical trial solutions generated revenue of CNY 24.3 million, a quarter-on-quarter increase of 17.4%.

Regarding operating costs and expenses, our operating costs amounted to CNY 341 million at 6.7% compared to the previous quarter, mainly due to a rise of CNY 32.6 million in referral and service fees, partially offset by the reduction of personal costs. Sales and marketing expenses were CNY 173 million, a 10% quarter-on-quarter increase, driven by a strategic increase in advertising efforts based on the accurate and efficient operations, leading to a higher marketing expenses to third-party traffic channels. General and administrative expenses were CNY 111 million, an increase of CNY 17 million from the previous quarter, primarily due to the internal loss of intangible assets related to the acquisition of Shenlanbao. R&D expenses were CNY 63 million, remaining stable compared to the previous quarter.

In Q3, the company's profitability improved significantly year-on-year, with net profit attributable to ordinary shareholders, reaching CNY 92.8 million, 2.5 times the third quarter last year, and a healthy quarter-on-quarter growth of 5.1%. The operating profit margin for the insurance business remained consistently strong at over 20%. With sustainable net profit, we continue to maintain a positive operating cash inflow, ensuring abundant cash reserves. As of September 30, 2024, the company had a cash position totaled about CNY 3.44 billion, supporting the company's flexibility and stability in shareholder returns and strategic deployment. In summary, the strong performance in Q3 highlights WaterDrop's resilience in facing the navigating market change. Looking ahead, we will continue to uphold our business philosophy and strategic choice, driving the company's healthy growth. And ladies and gentlemen, with that, we will conclude today's conference call. We do thank you for joining. Have a good time.