Earnings Call Transcript - LX Q2 2025

Operator, Operator

Thank you for your patience and welcome to the LexinFintech Holdings Limited Second Quarter 2025 Earnings Conference Call. I will now turn the call over to Mr. Will Tan. Please proceed.

Will Tan, Moderator

Thank you, operator. Hello, everyone. Welcome to our second quarter 2025 earnings conference call. Our results were released earlier today and are currently available on our IR website. Today, you will hear from our Chairman and CEO, Mr. Jay Wenjie Xiao, who will provide an update on overall performance and the strategies of our business. Our COO, Mr. Arvin Zhanwen Qiao, will then provide more details on our risk management initiatives and updates. Lastly, our CFO, Mr. James Zheng, will discuss our financial performance. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Last, please note that all figures are presented in renminbi terms, and all comparisons are made on a quarter-over-quarter basis, unless otherwise stated. Please kindly note, Jay and Arvin will give their whole remarks in Chinese first, then the English version will be delivered by Jay's and Arvin's AI-based voices. With that, I'm now pleased to turn over the call to Mr. Jay Wenjie Xiao, Chairman and CEO of Lexin. Please.

Wenjie Xiao, Chairman and CEO

Thanks for joining us today for our second quarter 2025 earnings call. We're pleased to report another quarter of strong growth. The company has effectively transformed its business model to focus on data analytics, risk management, and improved operations. In spite of economic uncertainties, our careful strategy has resulted in ongoing profitability recovery and sustainable growth. In the second quarter, total GMV reached RMB 52.9 billion, marking a quarter-over-quarter growth of 2.4%. Revenue grew by 16% to RMB 3.6 billion. Net profit hit RMB 511 million, representing quarter-over-quarter growth of 19% and an impressive year-over-year increase of 126%, a record for the last 14 quarters. These excellent results stem from continued improvement in asset quality and robust growth across our business ecosystem. Management is committed to enhancing shareholder returns and will increase the cash dividend payout ratio from 25% to 30% starting in the second half of this year. Additionally, in July, the company announced a $60 million share repurchase plan to be executed within the next 12 months. These actions will further elevate our shareholder returns above the industry average. Now, I’ll outline the specific business progress in the second quarter. Our unique business ecosystem has shown strong growth, enhancing our competitiveness and operational resilience. Our installment e-commerce segment targets the essential consumption needs of young customers. In the second quarter, we upgraded our supply chain and partnered with top-tier brands to expand our product offerings. We addressed diverse consumer needs by introducing two merchandising categories: high-quality products and factory outlet items. Additionally, by leveraging user insights, we developed a hyper-personalization strategy to tailor our operations and risk management to meet the needs of various customer segments. During the June 18 shopping festival, our e-commerce GMV surged by 139% year-over-year, positioning this business for rapid expansion. In our offline inclusive finance operations, we focused on localized efforts and expanded into lower-tier cities. Through customized risk management and competitive strategies, we enhanced our service capabilities, leading to steady growth in profitability. In the online consumer finance sector, we've accelerated development by collaborating with leading platforms to secure a strong market position and lay a foundation for future growth. Our tech empowerment business utilized standardized systems and risk management expertise to facilitate connections between partner banks and major platforms, improving their data-driven risk management capabilities, which has been recognized by our partner banks. This quarter saw significant growth in business volume and user count, maintaining our strong momentum. For our overseas operations, we continued to enhance our capabilities, achieving substantial growth in both volume and revenue over several consecutive quarters. We are committed to service excellence in our online credit business. In the second quarter, we expanded our product offerings to provide users with competitive terms and flexible repayment options, significantly boosting engagement. We launched a product with more competitive pricing for prime customers, upgrading the Legend card to meet their immediate borrowing and repayment needs. This product has been well-received since its introduction. For qualified small and micro business owners, we partnered with banks to offer products with flexible terms that lower financing costs and meet the segment's specific needs. Furthermore, AI has greatly improved our business quality and efficiency. Our large AI models are being extensively applied across various business scenarios, particularly in post-loan management, where we've achieved comprehensive AI support for processes like case allocation and customer operations. Our self-developed AI agents have also made strides, with 50 roles deployed in key areas such as operational strategy and automated monitoring, greatly improving our operational efficiency. We prioritize a user-centric approach to enhance consumer satisfaction and trust by optimizing service and efficiently addressing user needs. Our focus on consumer rights protection governance is evident as we integrate it into our business processes. We have developed a proactive system to advance consumer rights protection, increasing technology investments and refining over 50 digital tools to enhance service response and user satisfaction. Looking forward, we plan to maintain stable business scaling, mitigate risks, and ensure profit growth in the third quarter. Although new loan facilitation regulations set to take effect in the fourth quarter may change the industry landscape, we believe they will ultimately benefit compliant platforms like Lexin. We will strengthen our business ecosystem to build a competitive advantage and ensure ongoing growth. Therefore, we maintain our annual guidance for substantial year-over-year profit growth.

Zhanwen Qiao, CRO

Thanks, Jay. Next, I will review our key initiatives and achievements in risk management for the second quarter. During this period, despite a complex and uncertain macroeconomic environment, we took prompt actions to address potential impacts and sustain the reduction of risks. Specifically, we focused on identifying customers at risk from industry fluctuations and implemented measures to mitigate these risks. We also used interactive reoffers to boost high-quality asset volumes and employed large models to enhance our risk management capabilities, improving the efficiency of risk decision-making and increasing the accuracy of our pricing and credit line strategies. As a result of our initiatives, the risks associated with both new and overall assets continue to decline. The leading risk indicator for new loans, first payment default, experienced a decline of about 5% over 7 days in the second quarter compared to the prior quarter. Additionally, the day 1 delinquency ratio for our total loan portfolio decreased by roughly 2%, while the 90-days delinquency ratio fell by 6% quarter-over-quarter. I will now detail the key initiatives from the second quarter. First, regarding risk identification, we optimized our data models this quarter, concentrating on pinpointing customers vulnerable to industry fluctuations and mitigating risks. By analyzing time series data of credit risk across various credit cycles, we implemented causal inference techniques and scenario simulations to create a risk identification model that evaluates customers' sensitivity to environmental changes. This model has proven to be very effective. Customers with the same risk rating who are identified as highly sensitive exhibit a risk level that is 1.5 times higher than that of low sensitivity customers in the current environment. We also focused on using data with more stable characteristics, such as customer profiles, job stability, and personal asset status, to enhance our predictive capability for long-term risks, thereby improving the reliability of our credit services for high-quality customers. Second, we reinforced our risk management with preventive and proactive strategies. For customers identified by our model as vulnerable to external changes and presenting higher risks, we promptly reduced or suspended their credit lines to alleviate potential impacts. At the same time, we worked on enhancing our offers for quality customers. In the second quarter, we introduced a mechanism for customers to add credit enhancement documents, conducted personalized real-time reoffering integrating both automated and manual reviews, and launched an upgraded financial product featuring a higher credit amount and lower fee rate. These initiatives contributed to a quarter-over-quarter increase in the asset volume of prime customers and the number of active customers. In the third quarter, we will continue to fortify our risk management strategy that merges preventive and proactive methods to maintain the trend of risk reduction while expanding high-quality assets and customer bases. Third, in the area of e-commerce, we made significant upgrades to the risk management system, independent of our online consumer finance business. We established real-time risk decision-making capabilities across key processes like search recommendations, offer matching, credit approvals, and reoffers, allowing us to cater to diverse customer needs while effectively managing risks. With the independent risk management system, the e-commerce platform's risk identification capability improved by over 30% compared to the previous quarter. We observed a significant increase in approval rates for credit applications and order placements from quality platform users, promoting rapid growth in our e-commerce business. Lastly, we are enhancing our development and application of intelligent risk management tools. By leveraging the latest AI large models, we have created and implemented a credit line robot and a pricing robot, yielding positive outcomes. The credit line robot has increased the efficiency and effectiveness of credit line decisions, while the pricing robot has boosted volume growth through pricing reductions by establishing price curves based on experimental data and dynamically optimizing pricing strategies. Moving forward, we will continue to explore the use of large models in risk management, transitioning from quantitative to intelligent risk management, thus creating a competitive edge in our risk management capabilities. In the third quarter, as external uncertainties and industry fluctuations persist, we will keep enhancing our capabilities in automated high-risk asset screening and resolution, refining credit approval and lending management, and improving customer onboarding and transaction management while promptly addressing high-risk assets. Concurrently, we will optimize our credit approval and credit line granting strategies to better serve quality customers, enhance user experience, and facilitate ongoing growth of quality assets. These initiatives aim to ensure that key risk indicators continue to trend downwards.

Xigui Zheng, CFO

Thanks, Arvin. I will now provide a detailed overview of our second quarter financial results. Please note that all figures are presented in renminbi terms and all comparisons are made on a quarter-over-quarter basis, unless otherwise stated. We are pleased to announce another quarter of solid financial performance, marked by robust revenue growth, sustained profitability and expanding margins. We are on track on our profitability recovery trajectory. Revenue recorded RMB 3.6 billion in the second quarter, representing a 16% increase quarter-over-quarter. Net income grew strongly by 19% quarter-over-quarter and 126% year-over-year to reach RMB 511 million. Our net income margin increased to 14.3% from 13.9% last quarter. Net income take rate, calculated as annualized net income divided by the average loan balance increased 34 basis points to reach 1.92%. The net income, net income margin and net income take rate kept reaching record highs for the past 14 quarters, laying a solid foundation for profit expansion. This set of financial results underscores our ability to turn around and drive sustainable growth in the dynamic market conditions. To gain a clearer understanding of our business growth dynamics, let's take a holistic view of our financial results. First, if we add up credit facilitation service income and tech empowerment service income, net of credit cost, including the provisions and the fair value changes and the funding costs, we come up with a net revenue of the credit business. The net revenue provides a more accurate reflection of our credit business performance as it absorbs the impact of a different accounting treatment for capital-light and capital-heavy business as well as the shifting mix across quarters. In the second quarter, the net revenue of our credit business increased by 10% or RMB 183 million to RMB 2 billion. The net revenue of our e-commerce business, defined as the e-commerce revenue net of cost of inventory sold, increased by 71% or RMB 40 million to RMB 97 million. So, the total net revenue added up to RMB 2.1 billion. Operating expenses, including sales and marketing, research and development, general and administrative expenses, processing and servicing costs, tax and others increased by 9.8% or RMB 142 million to RMB 1.6 billion. So, if we deduct total expenses of RMB 1.6 billion from the total net revenue of RMB 2.1 billion, we get a net income of RMB 511 million, increased by 19% or RMB 81 million quarter-over-quarter. Driving the second quarter's strong financial performance are the following three business highlights, namely the flexible volume shift between business models, continued improvement in asset quality alongside sufficient provisioning and a robust growth in our e-commerce business. Now let me elaborate more on the three business highlights. First, flexible volume shift between business models highlights operational resilience, driving stable growth in volume, revenue and net profit. From a unit economics perspective, the net income take rate achieved 1.92% this quarter. The 34-basis point improvement quarter-over-quarter is mainly driven by an 82-basis point increase of revenue take rate of credit business, calculated by dividing the net revenue by the average loan balance. During the quarter, the net revenue take rate of credit business increased from 6.69% to 7.51%, the increase was primarily driven by the increase of APR of capital-heavy model, which increased to 23.2% in the second quarter from 22.6% last quarter and also the stabilization of early payoff impact that occurred during the last quarter, partially offset by the increase of funding costs. The improvement of net revenue take rate reflects our business resilience in a dynamic and complex environment. In the second quarter, we have observed a reduction in the supply of funds for the capital-light business due to the fluctuations related to the new regulation, leading to higher funding costs for both capital-light and capital-heavy models. To offset the impact, we proactively adjusted our business mix, switching more loan volumes from capital-light model to capital-heavy model. In the second quarter, the capital-light model accounted for 20% of GMV, decreased from 27% in the first quarter, mainly driven by the decrease of loans from the ICP model, which only accounted for about 15% of GMV down from 24% in the first quarter. The proportion of capital-heavy model increased to 80% from 73% in the first quarter. As you know, the borrowers from the capital-light model typically have lower risk profiles; to reflect this risk premium, the average APR of new loans under capital-heavy model increased. At the same time, the provision increased due to the increase of loans under the capital-heavy model. The smooth switch was supported by our enhanced risk management capability, which equipped us to accurately assess borrower risk, enabling risk pricing and product offering to optimize profitability and volume growth. Second, asset quality sustained the improvement trend, and the provision remained prudent and sufficient. Our asset quality has continued to improve for four consecutive quarters. In the second quarter, 90-day delinquency ratio declined by 16 basis points to 3.1%. FPD 7 of new assets further came down by about 5%. Day 1 delinquency rate of total assets also decreased by about 2% quarter-over-quarter. Also, our provision remained prudent and sufficient. As mentioned above, in the second quarter, our total credit cost, including three provisions line items and the fair value changes of financial guarantee derivatives increased by 13.6% quarter-over-quarter despite improved asset quality and a decreased loan balance. It is important to note that due to the net accounting policy we have adopted for change in fair value of financial guarantee derivatives and loans at fair value account, the amount was partially offset by guarantee income and recorded as a net value in our P&L. As such, it only represents part of the actual full provision. As another indicator of the sufficiency of our provisioning, our provision coverage ratio remained ample at 270%, up by 2 percentage points quarter-over-quarter and reached the highest level in the last four quarters. Third, e-commerce business gained further traction. Our e-commerce business is deeply integrated into our ecosystem, creating strong synergies and therefore, has become a unique competitive advantage. E-commerce not only generates gross profit by selling merchandise but also creates interest income by providing installment services to customers. Around 97% of e-commerce customers choose to finance their consumption with our installment service. In the second quarter, e-commerce GMV witnessed substantial quarter-over-quarter growth of 80% and year-over-year growth of 117%. E-commerce gross profit recorded RMB 97 million in the second quarter, up 71% quarter-over-quarter. Going forward, we continue to expect strong sequential GMV growth for the e-commerce business. Next, I'll go through some specific financial statement items. For our income statement, on the revenue side, total revenue reached RMB 3.6 billion, representing a growth of 16% quarter-over-quarter. Credit facilitation service income amounted to RMB 2.3 billion, up 4% quarter-over-quarter, driven by the increase in loan volume and the capital-heavy model, higher APRs and partially offset by the higher funding costs. Tech empowerment service income increased by 33% or RMB 205 million to RMB 830 million, mainly due to the release of provisions of revenue and ICP model, reflecting better-than-expected asset quality performance and increased income from our referral services. E-commerce platform service income increased by 69% to RMB 487 million, driven by increased GMV. On the cost and expense side, total operating expenses, which include processing and servicing costs, sales and marketing, research and development expenses, general and administrative expenses, increased by 10% to RMB 1.4 billion, mainly driven by the increase of sales and marketing expenses and processing and servicing costs. For balance sheet items, as of June 30, our cash position, which includes cash, cash equivalents, and restricted cash was approximately RMB 4 billion. Shareholders' equity remained solid at about RMB 11.6 billion. Looking ahead, despite ongoing market uncertainties and evolving operating environment, the management maintains its full-year guidance of achieving significant year-over-year growth in net income. Furthermore, we remain committed to enhancing shareholders' value, as demonstrated by our recent $50 million share repurchase program and $10 million CEO share purchase announced in July. The Board has approved a cash dividend of USD 0.194 per ADS for the first half of 2025. The share repurchase program, together with our dividend policy, has boosted our total shareholder return to above industry average level. Going forward, we will continue to evaluate opportunities to ensure we deliver optimal value to our shareholders. This concludes our prepared remarks for today.

Operator, Operator

Your first question comes from Emma Xu with BofA Securities.

Unidentified Analyst, Analyst

Congratulations on the strong results in a challenging environment. I have two questions. First, regarding the new regulations, what impact has the company noticed since the new loan facilitation regulations were implemented a few months ago? What measures will you take to address this impact? Second, the ecosystem has grown significantly in the second quarter. Can you provide more details on the development strategy and outlook for your ecosystem business?

Wenjie Xiao, Chairman and CEO

Thanks for your question. The new loan facilitation regulation has been in effect for a while now, and we believe it has impacted the industry. In the short term, we've seen a tightening in funding supply, leading to higher funding costs in the second quarter, and some risk metrics have shown minor changes, such as a slight decrease in collection rates. To mitigate this impact, we've implemented proactive measures since April, including tightening our risk management strategies. While collection rates fell a bit, our day one delinquency also decreased, balancing each other out. Our unique competitive advantages give us the flexibility to adapt our business model amidst these challenges. Over the long term, the new regulation is expected to alter the industry landscape, promoting a more standardized and healthier environment, which will benefit compliance-driven platforms like Lexin. We've navigated through previous regulatory changes, and we believe our experience allows us to continue adjusting our business model successfully. Lexin is committed to supporting regulatory oversight and will uphold our customer-centric philosophy while enhancing ecosystem synergies to ensure ongoing business growth. Therefore, we are confident in maintaining our guidance for significant year-over-year profit growth. Regarding your second question about our business ecosystem, we've made considerable progress. Our installment e-commerce business, which is the first of its kind in China, has been a key component of our ecosystem for over a decade. As part of our recent transformation towards a data-driven and risk management-focused model, we have established an independent risk management system for our e-commerce operations. This has contributed to substantial growth in e-commerce loan origination volumes over the past few quarters, notably during the June 18 shopping festival, where we saw our GMV rise by over 100%. In expanding our offline business into lower-tier cities, we are primarily targeting small and micro business owners, supported by our proprietary direct sales team. In the second quarter, we partnered with several new collaborators to enhance their connections with major platforms and banks while improving their digital risk management capabilities. Our tech empowerment initiative leverages our standardized systems and risk management expertise to facilitate connections with large platforms and bolster customer acquisition efforts. Additionally, our overseas business has experienced consistent quarter-over-quarter growth in both business volume and revenue, and we will persist in developing our team to ensure continued healthy growth.

Operator, Operator

Your next question comes from Alex Ye with UBS.

Huanan Zhou, Analyst

My first question is about the risk management system. Given the current uncertain external environment caused by regulatory changes, how does Lexin's risk management system enable you to effectively address potential risk fluctuations? Additionally, I would like to know more about the factors contributing to the improvement in your take rate.

Zhanwen Qiao, CRO

In response to uncertainty concerning the industry's rate performance due to new loan facilitation regulations, we took proactive measures starting in April. We tightened the risk approval standards for new customers to sustain a downward trend in new risk. For existing loans, we enhanced early reminders for repayment to reduce initial delinquency. Additionally, we implemented targeted measures for customers sensitive to industry rate changes, including reducing and suspending credit lines for those identified as high-rate sensitive by our models. This strategy has contributed to our steadily improving rate performance. Furthermore, we are focused on high-quality asset growth to establish a strong foundation for future development. We utilize advanced AI models to improve our risk management system and have refined customized pricing strategies that have enhanced our competitiveness for prime customers while also improving the overall user experience, supporting our high-quality asset growth. Overall, we aim to minimize the formation of high-risk assets while promoting the growth of high-quality assets. We have also strengthened our provisioning to bolster our risk buffer, thereby enhancing our ability to handle future uncertainties. In the second quarter, we increased provisioning by 13.6% to RMB 1.04 billion. This reinforced provision, coupled with improved risk performance, resulted in our provision coverage ratio rising to 270%. In summary, we will continue to prioritize high-quality asset growth while enhancing provisioning and maintaining steadily improving risk performance. At the same time, we will advance the application of intelligent risk management tools to improve efficiency.

Xigui Zheng, CFO

Okay. I will take the net profit take rate question. Almost a year ago, we told the market that thanks to the company's turnaround initiatives, we would be able to gradually improve the business profitability, and this would be reflected in our net profit take rate. And I'm happy to tell you that in the last four quarters, we have successfully delivered the promise of improving 20 to 30 basis points each quarter to reach 1.92% in Q2. We're now on track for the goal by the end of the year. As for Q2, the credit goes to the strong revenue growth from both the credit and e-commerce business, as I mentioned in my prepared script. Specifically, the net revenue of our credit business increased by 10% quarter-over-quarter or about RMB 183 million to RMB 2 billion. As a reminder, as I mentioned earlier, if we add up the credit facilitation service income, the tech empowerment service income, net of credit costs, including the provisions and fair value changes and the funding costs, we come up with the net revenue for the credit business. So, if you further break down to the next level, the net revenue of the capital-heavy model remains stable, driven by the increase of loan volume under the capital-heavy model, higher APRs and partially offset by higher credit costs and funding costs. By the way, as Arvin mentioned earlier, the increase of credit cost is mainly driven by our prudent provisioning policy. The net revenue of the capital-light model, on the other hand, increased by 33% quarter-over-quarter or about RMB 205 million to RMB 830 million, mainly due to the income from our referral services and from the release of provisions of revenue under the ICP model. This really reflects the better-than-expected asset quality performance within the ICP. In addition to the credit business, the net revenue of our e-commerce business, defined as e-commerce revenue net of the cost of inventory, increased by 71% or RMB 40 million to RMB 97 million, also contributing to the increase in our profitability. So, with the strong increase in revenue, offset by some increases from the operation costs and expenses, we get the net profit take rate of 1.92%, a 34-basis point higher than the previous quarter. This fully demonstrates the uniqueness and strong growth potential of our diversified business ecosystem. Looking forward, for Q3, we continue to expect relatively stable volume, improved risks, strong quarter-over-quarter net income growth. Therefore, we continue to expect the net income take rate will improve at a similar pace as before.

Unidentified Analyst, Analyst

This is Alan from Citibank. I have a quick question regarding shareholder returns. I saw that in July, you announced a $50 million share repurchase program. Could you provide more insight into the reasoning behind the buyback program? Additionally, do you have any plans to further enhance shareholder returns in the future?

Wenjie Xiao, Chairman and CEO

On July 21, we announced a $50 million share repurchase program to be executed over the next 12 months. Additionally, I intend to buy up to $10 million worth of shares using my personal funds. If the company's repurchase program is fully executed along with the key increases in the cash dividend payout ratio, our total shareholder return will exceed the industry average. With a forward PE ratio below 4x, the company presents compelling investment value. This repurchase program reflects management's confidence in the company's prospects and strengthens our commitment to providing value to our shareholders. Regarding the execution of the repurchase, we will start the program after releasing the second quarter results and will adhere to repurchase guidelines while considering market conditions. We will provide regular updates on the progress of the repurchase in our quarterly earnings release. The company prioritizes shareholder return, and we will continue to seek various ways to enhance value for our shareholders.

Operator, Operator

Thank you. That does conclude our question-and-answer session. I'll now hand back for any closing remarks.

Will Tan, Moderator

Thank you for joining today's call. If you have any more questions, please do not hesitate to contact us. Thanks again.