Yiren Digital - Earnings Call - Q4 2024

Transcript

Operator (participant)

Good day, and welcome to the Yiren Digital Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal Conference Specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, you may press star, then two. Please note this event is being recorded. I would now like to turn the conference call over to Ms. Keyao He. The floor is yours, ma'am.

Keyao He (Director of Investor Relations)

Thank you, Operator. Good morning and good evening, everyone. Today's call features the presentation by the Founder, Chairman, and CEO of CreditEase, our CEO, Mr. Ning Tang, and our CFO, Mr. Yuning Feng. There will be a Q&A session after the prepared remarks. Before beginning, we'd like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor Provision of U.S. Private Securities Litigation Reform Act of 1995. Such statements accept the risks, uncertainties, and factors that can cause actual results to differ materially from those contained in any such statement. Further information regarding future risks, uncertainties, or factors is included in our filings with the U.S. Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements as required under relevant laws.

During the call, we will be referring to certain non-GAAP financial measures and 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 the U.S. GAAP. For information about those non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings strategy. I will now pass it to Ning for opening remarks.

Ning Tang (Founder, Chairman, and CEO)

Thank you all for joining our earnings conference call today. We closed out the year on a strong note, delivering another solid quarter of results that were in line with our previous guidance. The year 2024 marked a significant milestone for us, driven by four key achievements. Firstly, we reshaped and upgraded customer segments for our financial services business, significantly improving asset quality and paving the way for long-term sustainable development. Secondly, we made meaningful progress in the development and application of AI. By integrating our proprietary AI system throughout our operations, including customer acquisition, customer service, and asset management, we are seeing significant improvements in operational efficiency and user experience. Thirdly, our international business steadily made progress throughout the year, meeting our phased objectives and achieving profitability. While expanding our operations in the Philippines, we are also working to replicate this success in more countries and regions moving forward.

Lastly, our insurance brokerage business is actively adopting a digitization and internet-driven model. While the traditional model continues to be a major revenue contributor for this segment, social media has emerged as an increasingly vital channel for client acquisition. To capitalize on this trend, we have established a dedicated team focusing on social media to drive conversion rates and further expand our digital footprint. Together, these achievements are laying a solid foundation for our next phase of higher quality growth, one that will continue to create value for our stakeholders in the years ahead. Now, I will go into details of our operational highlights for the quarter. Our financial services business continued to grow during the fourth quarter of 2024, with total loan volume reaching RMB 15.4 billion, a 32% year-over-year increase.

The number of borrowers remained stable quarter over quarter at 1.6 million and grew 14% from the same period last year. For the full year 2024, total loan volume reached RMB 53.6 billion, representing an impressive 49% increase from the previous year, surpassing our internal target. At the same time, our Yi Xiang Hua lending platform maintained strong popularity, with 4.5 million monthly active users in the fourth quarter, a 27% year-over-year increase. As I mentioned earlier, we are seeing clear improvements in asset quality. For full year 2024, average first payment default rate for 30 days rate dropped by 13 basis points compared to 2023, reflecting stronger anti-fraud measures. As of December 31st, 2024, delinquency rates for 1-30 day and 61-90 day buckets decreased by 20 basis points and 10 basis points, respectively, from the previous quarter. Hold on one second. Let me get the grid.

Moreover, M1 recovery rates in the fourth quarter further rose by 23 basis points to reach a record high. The upgrade in our customer base has clearly established a strong foundation for our long-term growth. On the funding side, we made substantial progress in expanding our funding partnerships by adding 22 new funding partners in 2024. Our funding costs in the fourth quarter saw another 23 basis points decline sequentially, translating into a total decline of 210 basis points compared to the same period in 2023. Moving on to our international business, we have upgraded our customer mix and shifted towards higher quality borrowers with a better credit performance in the Philippines. This led to a noticeable improvement in profitability, which has already turned positive and reached the high single digit.

Currently, monthly loan volumes are in the RMB 30 million-RMB 40 million range, with total loan volume in 2025 expected to double compared to 2024. We are also exploring opportunities to replicate this successful model in other countries and regions and look forward to updating you on our progress in the near future. On our AI strategy, we have constantly prioritized the development and application of AI as a key element of our overall strategy homework. In 2024, research and development expenses totaled RMB 412 million, a year-over-year increase of 177%, of which approximately RMB 200 million was allocated specifically to AI development. We have continuously built and refined our AI models for collections, customer service, quality assurance, and overseas identity verification, among other uses. These models have been widely applied across various areas of our operations, resulting in significant cost savings and improvements in efficiency.

For our domestic business operations, as of the end of the fourth quarter, 81% of day-one overdue cases were handled by AI robots, reducing labor cost savings by RMB 1.9 million during the quarter alone and approximately RMB 9 million for the year. Our AI-powered intelligent funding routing system significantly enhanced the funding allocation efficiency by optimizing fund distribution based on the borrower's credit performance, funding partners' risk preference, and funding cost. This resulted in cost savings of RMB 44 million for the year. We recently integrated DeepSeek, which is expected to further enhance our deep thinking and customer analysis capabilities, providing further support to our customer service strategy. For overseas operations in the Philippines, our AI-powered ID verification model achieved an accuracy rate of over 96% during the quarter.

We also applied our AI systems to loan collections, which improved the customer service, the customer experience, and reduced the customer complaints by 47% in the fourth quarter. Moving on to our insurance brokerage business, 2024 was a challenging year for the entire industry due to regulatory changes with lower interest rates and the impact of the unified commissions and fees in reporting and underwriting policy. Total premiums in 2024 were over RMB 4.4 billion, down 10% year-over-year. Specifically, life insurance products saw strong renewal rates of 96% in the fourth quarter, much higher than the industry average, reflecting higher client recognition of our services. Moreover, as I mentioned earlier, we have been proactively expanding our business online with the support of AI-driven customer service and AI-generated content.

As of the end of 2024, we have successfully onboarded over 10,000 users who are now engaged with us and in the conversion pipeline, making a strong start. Meanwhile, additional efforts to create synergies between our lending platform and the insurance services are beginning to pay off. By offering customized insurance products to our borrowers, growth momentum remains strong, with December premiums from this channel increasing more than eight times compared to September 2024. For our property insurance, total premiums reached over RMB 2.0 billion in the full year 2024, driven by our strategy of strong channel partnerships and tailored solutions. Currently, we have over 120 institutional partners, including more than 40 in the property insurance sector, and we offer more than 1,100 property insurance products.

Moving forward, we will maintain this strategy and explore collaborative opportunities in additional technological and emerging fields, including AI, advanced modeling, and the low-altitude economy sector. Just some recent exciting news to share. Our insurance brokerage arm has successfully crafted an insurance solution for two Robinson R-44 helicopters operated by Xinjiang Tianying General Aviation Company Limited. We look forward to sharing more good news in the quarters to come. Last but not least, we are pleased to announce a cash dividend for the second half of 2024 of $0.22 per ADS. This dividend is expected to be paid on or around May 15, 2025, to holders of the company's ordinary shares and ADS as of the close of business on April 30, 2025, Hong Kong time and New York time, respectively.

In conclusion, AI development and exploration, high-quality growth, and global expansion will be the key themes of our business journey in 2025. We will continue to embrace the changes shaping our current era, consistently exploring and refining our strategies to deliver sustainable long-term returns for both our company and our shareholders. Now, I'll pass it to Yuning, who will go through our financial performance.

Thank you, Ning. Hello, everyone. On this call, I will be focused on our key financial highlights. Please refer to our earnings release and IR deck for further details. Those are available on our website. First of all, we are pleased to report a solid year of strong financial performance. This 2024 full-year revenue is in the 90% annual growth, meeting our previous full-year guidance. In particular, total revenue of the fourth quarter of 2024 sustained this growth momentum with a 14% year-over-year increase.

In the financial services segment, total loan facilitation continued its strong momentum, reaching RMB 15.4 billion in the fourth quarter at 32% year-over-year. Loan volume facilitated in the full year 2024 reached RMB 53.6 billion, jumping by 49% compared to 2023. This growth was primarily driven by robust demand for our small revolving loan product, coupled with a steady increase in demand from repeat higher-quality borrowers. The platform's ability to track and retain these high-quality borrowers has significantly contributed to the overall increase in loan volume. Consequently, revenue from this segment in the fourth quarter grew 34% year-over-year to RMB 1,048 million, that's RMB 1.048 billion, and revenue for the whole year grew by 38% annually to RMB 3.5 billion. In the insurance sector, our gross retained premium totaled RMB 1.1 billion in the fourth quarter 2024, making a 9% year-over-year decline.

The year-over-year decline was primarily driven by a significant drop in life insurance sales, resulting from ongoing industry-wide impact of regulatory changes and adjustment to our product offering. In the fourth quarter, revenue from our insurance segment increased by 8% year-over-year to RMB 106 million. This increase was due to higher-than-expected renewal rate. For the year of 2024, revenue from the insurance segment reached RMB 408 million, down 58% year-over-year, and we expected a double-digit recovery in 2025. In the consumption and lifestyle segment, as we strategically scaled back product offering during this quarter, the total revenue dropped 25% year-over-year to RMB 298 million. Revenue from revenue of this segment for the year was more than RMB 1.9 billion at 36% year-on-year. Currently, we are conducting a strategic review of this segment to better understand its potential and identify the best ways to serve our customers.

Based on our findings, we will adjust our approach and opening to ensure we effectively meet their needs. On the expense side, sales and marketing spend in the fourth quarter increased 45% year-over-year to RMB 298 million. This yearly growth was primarily driven by the rapid growth of our financial services division and the improved marketing strategy aimed at attracting new and high-value customers. Research and development expense increased 246% year-over-year to RMB 165 million. This is fueled by ongoing investment in AI enhancement, the development of advanced technology, and the strategic hiring of specialized AI talent. Origination, servicing, and other operating costs were RMB 197 million in the quarter, up 7% year-on-year due to the expansion of our financial services business. G&A expenses for the quarter decreased by 16% year-over-year to RMB 42 million. This decline reflects our AI-driven efficiency improvements, resulting in labor cost savings.

The allowance for contract assets and receivables for the quarter was RMB 203 million, up 103% year-over-year. This is mainly driven by the increase in allowance for accounts receivable and financing receivables, reflecting our prudent response to heightened uncertainty in future market conditions. Provision for contingent liability this quarter increased to RMB 251 million from a reversal of RMB 1.5 million in the same period of 2023. This reflects the sustained growth in loan volume facilitated under our risk-taking model, which, in accordance with our current accounting standards, requires substantial upfront provisions. However, the associated guarantee revenue will be recognized periodically in the profit and loss statement as guarantee services over time. This introduces a timing difference in revenue recognition under this product model. That said, when assessing our overall loan portfolio in the long run, profitability will exhibit a U-shaped trend.

In the fourth quarter, the revenue from guarantee services gain reached RMB 207 million compared to RMB 9 million in the same period last year, reflecting the growing loan volume facilitated under the risk-taking model. Now, on the bottom line, net income of this quarter was RMB 331 million, decreased 42% year-over-year. The profit margin for the fourth quarter was 23%, maintaining a healthy stable level compared to 24% in the previous quarter. Total net income for the year of 2024 was RMB 1,582 million, down 24% compared to the previous year. The decline in net income can be attributed to three key factors. First, as previously mentioned, there was a reduction in overall probability within the insurance business. Second, marketing and R&D expenses increased as we continue to invest in attracting new high-quality borrowers for our financial services segment and enhancing our in-house AI capabilities.

Thirdly, a substantial upfront provision was allocated due to growth in loan volumes under the risk-taking model. Regarding our cash flow, following a one-time strategic outflow last quarter, our net cash flow from operations normalized at RMB 373 million this quarter, compared to RMB 470 million in the same period last year. On our balance sheet, our cash and cash equivalents remain strong at RMB 3.8 billion, underscoring our financial flexibility and position to capitalize on our strategic opportunities. Now, regarding shareholder return, we are glad to announce that the company is about to distribute cash dividends for the second half of 2024, amounting to $0.22 per ADS and approximately 20% payout ratio, up from 14% for the first half of 2024.

The dividend is expected to be paid out on about May 15, 2025, and the record date is as of the close of business day on April 30, 2025, based on Hong Kong time and New York time respectively. Moreover, as of December 31st, 2024, we have cumulatively repurchased 5.2 million ADS into the market for the total of approximately $17.9 million under the 2022 share repurchase program. Lastly, on our business outlook, based on our assessment of current business and marketing conditions, we expect our revenue for the full year of 2025 to stand between RMB 5.5 billion-6.5 billion, with a healthy net profit margin. This represents our current and preliminary assessment, which may be subject to changes and uncertainties. This concludes our remarks.

Keyao He (Director of Investor Relations)

Thank you. Operator, we're now open for Q&A.

Operator (participant)

We will now begin the question-and-answer session.

To ask a question, you may press Star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press Star, then 2. Again, it is Star, then 1 to ask a question. At this time, we will just pause momentarily to assemble a roster. The first question we have will come from Haonan Zheng of Erdos Capital. Please go ahead.

Haonan Zheng (Analyst)

Hi, it's Haonan from Erdos Capital. Thanks for taking my question. I have two questions here briefly. As the Chinese government now relaxes regulation, what change will the company make, especially when your competitors may act more positively? Thank you. It's the first question.

Ning Tang (Founder, Chairman, and CEO)

The question is about, as the macro environment becomes more favorable, what is our action plan?

Haonan Zheng (Analyst)

Yeah, yeah.

Ning Tang (Founder, Chairman, and CEO)

Okay. Yeah, indeed, the macro environment is getting better, and we will continue to drive up repeat borrowing rate. Yeah, now it's below 70%. We want it to be 70% in this year. We are close. Yeah, so we will try and get there. That will, yeah, make our, yeah, risk side, yeah, stable and improve. At the same time, we will do better customer acquisition, smarter customer acquisition. We work with, yeah, Douyin and such, yeah, platforms, so on, to do real-time advertising. Basically, we pick up the prospects to target, utilizing our, yeah, AI-driven analytics model. That will, yeah, make us more kind of proactive, yeah, in the customer acquisition process. Also, we'll explore more acquisition channels, like non-finance, like life-related platforms, applications, yeah, for more loan volume. Also, as our customer mix gets upgraded, we will increase average ticket size. Yeah.

Now it's like, yeah, 7-8K. It will further go up likely in the year. Yeah, we will keep the risk side stable, as I first highlighted. We'll do that by taking a variety of measures, yeah, keep doing a good job on that side. We can also, yeah, offer better customer experience, I suppose. Yeah, further streamlining the application process and, yeah, upgrading the user interface, so on. We will be, yeah, more competitive in the marketplace. Yeah. Thank you.

Haonan Zheng (Analyst)

Okay. Thank you. Thank you for the answer to the question. Second question is, can I share some long-term goals for the overseas business? What scale will the business achieve, and how much will we invest in the overseas business? Do you think that overseas business could be bigger than the domestic business one day? Yes. Thank you.

Ning Tang (Founder, Chairman, and CEO)

Yeah. One day, yeah.

Probably, yeah, because the international market is very, very big. Yeah. It is as big as the domestic market. Yeah, I guess it is quite possible that one day it will be, yeah, maybe half-half, but we are a bit, yeah, still in early stage right now. We will try to make the international business a meaningful revenue contributor in the next, yeah, couple of years, yeah, three-year timeframe. Yeah, because we can utilize AI very well in those markets. Also, we've had a good momentum developed in the Philippines, and the success can be replicated. We've also done research. Other than Southeast Asia, we've made progress, yeah, in America, Southern America, and also the Middle East, so on. Yeah, we are quite optimistic, yeah, to grow globally. That is certainly our, yeah, strategic objective, yeah, because we are a global player.

Yeah, our competitive advantages in domestic China, many of them can be applied as we grow globally to other parts of the world. Thank you.

Haonan Zheng (Analyst)

Thank you. Thank you.

Operator (participant)

The conference call has now concluded. If you have any further questions, you may contact Yiren's IR department for any follow-ups. Thank you for attending today's presentation. At this time, you may disconnect. Thank you, and have a great day.