Earnings Call Transcript - LX Q1 2023

Operator, Operator

Good day and thank you for standing by. Welcome to LexinFintech's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. And now I'd like to hand the conference over to Ms. Jamie Wang, IR Manager. Please go ahead ma'am.

Jamie Wang, IR Manager

Thank you. Hello everyone. Welcome to Lexin's first quarter 2023 earnings conference call. With us today on the line are CEO, Jay Xiao; President, Jared Wu; and CFO, James Zheng. Before we get started, I'd like to remind you that the call and presentation contain business outlook and forward-looking statements, which are based on assumptions as of today. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Jay will first provide an update on our overall performance, James will cover the financial results in more detail, and lastly, Jared will then discuss risk management. I'll now turn the call over to our Jay. His remarks will be in Chinese and the English translation will follow. Jay please.

Jay Xiao, CEO

Good morning and evening everyone. It's a pleasure to speak with all of you again. In the first quarter, as consumption gradually recovered post-pandemic and the macro environment continued to improve, consumer finance experienced moderate growth through a two-wheel drive strategy focused on upgrading and data-driven optimization. We achieved another quarter of strong results with RMB60.9 billion in loan origination volume, a 41% increase year-over-year. The total outstanding balance rose to RMB107 billion, marking a 28% year-over-year increase. Revenue reached RMB2,980 million, up 74% year-over-year. Net profit was RMB327 million, a remarkable 302% increase year-over-year. Our first quarter results indicate ongoing improvement in profitability, with the net profit margin rising to 11% from 4.8% a year ago. This marks steady growth for the fourth consecutive quarter, with various operating indicators trending positively. Let me provide more detailed information. There were three major operational highlights in the first quarter. First, as we enhanced our user risk assessment capabilities, we accelerated our pace in reducing high-risk user segments and therefore improved the overall asset quality. Second, we continue to refine operations and further optimize operational efficiency. Third, we have been implementing cost efficiency initiatives, resulting in our profitability steadily rebounding. First, in terms of asset quality, we further pushed ahead on overhauling our risk management system, focusing on the maintenance and operation of high-quality existing customers and gradually eliminating more high-risk users. We have iterated and upgraded the user assessment system, the risk renting model, which automatically integrates a variety of risk models along with the combination of multi-dimensional risk factors into an overall user risk assessment scheme. These upgrades help us to conduct more comprehensive risk assessments, and therefore, make more accurate decisions on users. After being put into use, the new loan volume in the first quarter contributed by prime users increased to 88.0% from 77.0% a year ago. Second, in terms of operational optimization, we upgraded our marketing system and segmented our users into more detailed and various categories based on the underlying customer tagging system and over 10 evaluation models considering users' borrowing, marketing preferences, responsiveness, offer satisfaction, etc. For certain customer groups, the application of this new detailed separation of user segment model pushed up the operating profit of that specific customer group by 70.0%. On this basis, we sorted out a marketing strategy decision tree structure and launched marketing strategies accordingly, significantly boosting users' activities. Under this new optimized operational system, in the first quarter, our telemarketing capabilities have been significantly strengthened. The loan volume contributed by telemarketing channels grew by 92.0% sequentially. At the same time, costs significantly decreased in the quarter, with telemarketing cost per sale falling 49% year-over-year. We expect to save 23.0% of the original annual telemarketing cost. On front of reactivating paid-up customers, the conversion rate increased 15.0% quarter-over-quarter, and loan volume from those converted customers grew 15.0% quarter-over-quarter. Additionally, these results were achieved with half of the marketing cost. Third, we have enhanced profitability attributing to our continuous efforts in cost optimization initiatives and a further reduction in financing costs. In the first quarter of 2023, G&A expenses stood at RMB97 million, a 17.0% decrease from a year ago. This clearly indicates improved operational efficiency. Funding costs further dropped to 6.6%, which is 0.2 percentage points lower than last quarter and 1.6 percentage points lower from a year ago. It's worth noting that this is a historic low of funding costs during the past three years. In April, we successfully resumed our Annual Financial Partners Conference, which was suspended during the three-year pandemic period. We were honored to have over 100 financial institutional partners with whom we will certainly strengthen our business cooperation in the future. We remain committed to investments in research and development, as we firmly believe technology is the core engine of our business growth. In the first quarter of 2023, research and development investments reached RMB130 million, maintaining one of the highest technology input levels amongst our peers. On the data front, we have put tremendous effort into data mining and analyzing our entire data. Accordingly, we're able to find links and correlations amongst various data sets. Furthermore, we developed simulation prediction models, attribution models for abnormalities, AB testing platforms, etc. AuthBridge empowered management to steer business in a more data-driven and intelligent manner. We have continuously explored the utilization of new technology to optimize operational efficiency and improve user experience. In the first quarter of 2023, we expanded the application of our AI large language model in our business at a faster pace, which resulted in a noticeable improvement in efficiency among the application areas including coding assistant tools, initiative designs, telemarketing, and smart customer services. For example, the application of this AI model in our telemarketing scenario pushed up credit line approval rates by 70% compared to the technology service supplied by vendors and also boosted order placing rates on the exact date that borrowers were granted credit lines by 10%. Looking ahead, we will comprehensively apply the model to the areas of risk management, anti-fraud, etc. Additionally, we further enhanced our existing unique Lexin ecosystem. First, the e-commerce business reached RMB113 billion GMV, an increase of 69.0% from last year. Cumulative customers grew by 71.0% compared to last year, demonstrating the robust growth of GMV end-users in e-commerce business effectively fueled the engine of Lexin's consumption ecosystem. Second, the technology empowerment SaaS business achieved tangible progress and won recognition from various financial partners including local commercial banks with AUM over RMB1 trillion. This technology empowerment service facilitates our cooperation with financial partners and deepens our business relations. Third, we plan to expand our offline sales team and leverage our expertise in direct sales channels in light of the gradual recovery of China's economic activity. Our offline acquisition channels bring more first-hand user information, hence more accurate credit assessments, ultimately creating a unique competitive advantage. The strong results in the first quarter were mainly attributable to our risk management capabilities upgrading in customer assessments and improvements in customer and asset quality. It is also due to our continued refining of operations and cost reduction initiatives. As for the second quarter, we understand that the economic recovery and resuming consumption is a long process. We'll continue to undertake a more prudent approach. Based on preliminary affirmations, loan volume in the second quarter is expected to reach RMB63 billion to RMB63.5 billion, representing a 28% to 29% growth year-over-year. Next, I'll hand over the call to our CFO, James, to share more detailed financials. Thank you.

James Zheng, CFO

Thank you, Jay. I will now provide more details on our financial results. Please note that all numbers are in RMB unless otherwise stated. In the first quarter, we continued our fourth consecutive quarters of recovery, both in our overall business and in our financial numbers. We expect this trajectory of turnaround to continue in light of the rebound of China's economy and our dedicated efforts in optimizing operations. The strong performance in the first quarter was a result of management's continuous efforts in overhauling our risk management, focusing on better quality user segments, upgrading our technology and operational capabilities, as well as our new cost restructuring initiatives. First, please let me explain, at a high level, what happened in the quarter compared with the same quarter of 2022. The loan originations for the quarter reached RMB60.9 billion, an increase of 41% year-over-year, beating the Q1 guidance we provided earlier. Revenue grew by 74.2% year-over-year to reach around RMB30.0 billion for the quarter, primarily driven by GMV growth and an increased loan balance, which reached RMB107 billion. The weighted average APR stood at a little over 24% for the fifth quarter, close to around 1 percentage point lower than a year ago. Loans with APR under 24% now make up more than 80% of our loans. Partially offsetting the negative impact from the lower APRs on our loans was a decrease in our cost of funding from 8.2% a year ago to 6.6% in Q1. It's worth noting that this is a historical low of funding cost during the past three years. Loan tenures increased to 15.1 months versus 12.3 months a year ago. As we emphasized last quarter, overhauling risk management remains our top strategy for the year. We continue to focus on upgrading to better credit user segments and rebooting the risk team, the systems, processes, and infrastructure. Jared will elaborate more on this shortly. The improved results from our efforts can be partially seen in our 30-day plus delinquency rate, which improved to 4.57% in the first quarter compared to 4.62% in the fourth quarter of last year. The 90-day plus delinquency rate stood at 2.53%, basically remaining stable compared to the previous quarter. This was due to the 90-day plus delinquency rate being a more lagging indicator than the 30-day plus metric. In Q1, we have been pushing ahead a series of cost restructuring initiatives that we launched last year and have seen further improvements to operating expenses. Total operating-related cost and op expenses including processing and servicing cost, sales and marketing, R&D, and G&A as a percentage of average loan balance stood at 1.16% versus 1.28% in Q1 of last year. This cost optimization happened despite a slight pickup of sales marketing expenses while G&A, R&D, and the processing and servicing costs all came down. We will remain committed to undertaking these cost restructuring initiatives and expect our efforts to bear more fruit in the long run. As a result of the aforementioned, we are able to report a net income of RMB327 million, an increase of 302% year-over-year. The net margin improved to 11% versus 4.8% in Q1 last year. This clearly represents a steady upward trajectory of our operational results with each quarter improving over a year ago. Apart from the above year-over-year analysis, I would also like to elaborate a little bit more on the progress achieved through quarterly comparisons. Total GMV was RMB60.9 billion, an increase of 8.7% quarter-over-quarter as we grew the business with a prudent approach and put risk management as a top priority. In the first quarter, we saw a slight decrease in GMV on our e-commerce platform from the boosted high level during the Singles' Days Shopping Festival in Q4 last year. If we exclude the revenue from e-commerce business, total Q1 revenue grew by 4.5% quarter-over-quarter. Considering the impact of e-commerce business seasonality, total revenue for the whole group stayed at about RMB3 billion, almost flat on a quarter-over-quarter basis. Take rate fell slightly to 2.5% from 2.6% last quarter. The minor fluctuation in the take rate is a blended result of more booking of provision due to longer tenure loans and the continuous improvement in asset quality and the reduction in funding costs. Operating expenses stayed almost flat with a minor 1.6% increase quarter-over-quarter, attributed to a pickup in sales and marketing related costs in user growth. As a result of the aforementioned, we achieved sequential growth in net income of 8.7% and boosted net margin to 11% from 9.9% in the last quarter. To summarize, we have delivered a noticeable improvement during the first quarter from both a year-over-year and a quarter-over-quarter perspective. This marks the fourth consecutive quarter of V-shaped recovery both in topline and bottom-line since we hit the lowest point of operational results in Q1 last year. As we mentioned last quarter, we are fully aware we have a long way ahead in our turnaround. The year of 2023 unfolds with a good start indicating we are well on track. Next, let's take a detailed look at the financials. Our total operating revenue for the first quarter was RMB3 billion, representing a decrease of 2.2% quarter-over-quarter due to the seasonality of the e-commerce business and an increase of 74.2% year-over-year, mainly driven by the credit facilitation services and the e-commerce business. Revenue from credit facilitation service was approximately RMB2.1 billion, representing a 7.8% increase quarter-over-quarter and a 136% increase year-over-year, driven by GMV growth. Revenue from tech-empowerment service was RMB368 million, representing a 10.9% decrease quarter-over-quarter and a 26% decrease year-over-year, primarily due to the change of product mix among various tech-empowerment services. Revenue from the installment e-commerce platform service was RMB499 million, representing a decrease of 25.9% from the last quarter and an increase of 56.6% year-over-year, due to the seasonality of the e-commerce business. Sales and marketing expense increased by 4% quarter-over-quarter, mainly due to our stepped-up investment in acquiring better quality users. Our goal is to upgrade to better quality customer groups and obtain higher LTV. While we are taking a prudent new acquisition strategy now, we will keep on closely monitoring macro data as China's economy gradually recovers to seize growth opportunities when the right timing comes. Research and development expenses decreased by 4.5% quarter-over-quarter and decreased by 15.1% year-over-year to RMB129 million due to efficiencies. G&A expenses remained almost flat on a quarterly basis and decreased 17% year-over-year to RMB97 million, showing a noticeable cost efficiency achievement. The G&A expense remained at almost the same level on a quarter-over-quarter basis while our topline GMV maintained upward momentum due to a series of cost initiatives. Going forward, we plan to step up efforts in this regard. Net profit was approximately RMB327 million in the first quarter, an 8.7% increase quarter-over-quarter and a 302% increase year-over-year, which beat the high end of our initial expectations. At the end of the first quarter, the company had a cash position of around RMB6.5 billion on hand and a net equity position of RMB9 billion. Finally, I would like to discuss our outlook for the second quarter of 2023. As we know, economic and consumption recovery usually will take time, and we are monitoring closely on the overall macro and consumption outlook. Based on the company's preliminary assessment of current market conditions, total loan originations for the second quarter of 2023 are expected to be around RMB63 billion to RMB63.5 billion, representing an increase of 28% to 29% on a year-over-year basis. These estimates reflect the company's current expectations and are subject to change. The strong results of the first quarter clearly demonstrate that our turnaround is well underway. In the long run, our dedicated efforts in risk management, cost initiatives, as well as new user acquisitions will establish solid foundations for our long-term goal of sustainable growth. With that, I would like to turn the call over to our President, Jared Wu, who will discuss our risk management. Jerry, please go ahead.

Jared Wu, President

Thank you, James. Good morning and good evening, everyone. It's a pleasure to speak with all of you again. Next, I'd like to provide more details about our risk management measures and improvements for the past quarter. Since the beginning of 2023, we have seen a gradual recovery in China's economy. As such, we are maintaining our strong focus on risk management and continuing our careful approach to risk and customer acquisition. In addition, we have been allocating more resources and putting more effort to better serve and favor our prime customers. In terms of our risk modeling, we have been continuously iterating our thoughtful model and enhancing our user risk assessment capabilities. In the first quarter of 2023, the day-one delinquency continued to drop, and overall asset quality improved, with the 30-plus day delinquency down 5 basis points quarter-over-quarter at 4.57%. The 90-plus day delinquency, based on our last indicator, remained unchanged sequentially at 2.53% as of the end of the first quarter. Currently, as business and daily life of people continue to normalize and consumer confidence gradually restores, we will continue to hold risk management as one of the top priorities in business operations, and we expect overall asset quality to maintain a positive upward momentum. In the first quarter, increasing the portion of prime customers remains our most crucial objective, so we continue to work on upgrading our risk management system, including key initiatives. First, we continue to iterate and upgrade our risk management system under the business strategy of risk-driven operations, improving the granularity and overall efficiency of risk management. We're further refining our customer segments and increasing the depth and width of our user identification capabilities while reviewing prior year's customers and optimizing our asset structure. Second, we emphasize investing in the coverage of PBOC credit data and strengthening the utilization of credit data. At the same time, we continue to introduce more compliance data sources, combined with the thorough usage of internal consumption behavioral data to ensure that we can identify customer credit profiles more accurately and further refine our customer segmentation. Third, we continue to iterate and upgrade the model matrix for different customer segments, which improves our ability to assess customer credit profiles. This should be the most essential pillar for us to increase the proportion of prime customers and will be one of the key projects we continue to invest in. We believe that in the remainder of 2023, we will make more breakthroughs in our user identification capabilities. 2023 is a year of economic recovery in China. We are committed to upgrading our core risk management capabilities and accelerating the strengthening of our refined risk management system. As Jay and James mentioned earlier, we maintain a cautious view of the macroeconomic environment, adhering to the principle of risk-driven management, monitoring the market externally, and building capacities internally. Above all, we firmly believe that with a diverse vision and a solid infrastructure, we can continuously generate sustainable long-term returns for all shareholders.

Jamie Wang, IR Manager

Thank you. This concludes our prepared remarks. Operator, we are now ready to take questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Frank Zheng from Credit Suisse. Please ask your question, Frank.

Frank Zheng, Analyst

Thank you to management for addressing my questions. This is Frank from Credit Suisse. My first question pertains to the recent supply and demand dynamics. In the first quarter and so far in the second quarter, how would you characterize the recovery of credit demand? Additionally, has there been any change in risk appetite on the supply side? Lastly, could management share more insight into the strategic or operational focus for the remainder of the year? Thank you.

Jay Xiao, CEO

Thank you management for taking my questions. This is Frank from Credit Suisse. My first question is regarding the recent supply and demand dynamics. In the first and second quarters so far, how would you describe the recovery of credit demand? Additionally, has there been any change in risk appetite on the supply side? Lastly, could management share more details on the strategic or operational focus for the remainder of the year? Thank you very much.

Jamie Wang, IR Manager

So, I'll do the translation. Thank you, Frank. In terms of demand side, as you can see from our first quarter's results, our overall loan volume has increased, and we actually saw the rebound of the overall demand in the first quarter. It was mainly attributed to a couple of factors: the first one being the COVID and the lockdown quarantine being over, which led to a spike in consumption needs and the overall recovery. Second, it was mainly due to our refined operations and increased capabilities in risk assessment, allowing us to better recognize and serve the right customers, particularly our good existing customers. As you know, we have a very large existing customer pool. With our improved risk assessment capabilities, we are able to better identify them and explore their value. As of right now in the second quarter of 2023, we see stable trends. However, as the spring break passes, the demand has slowed down a little bit, though the trend of increasing demand remains relatively strong. We have various products in our ecosystem, including e-commerce, which offers special consumption scenarios. When lending needs aren't as strong as the previous quarter, we can create demand through product discounts to attract both new and existing customers. Looking ahead to the second quarter, we are preparing for the 618 festival, which will be a great opportunity to generate more demand thanks to our unique ecosystem. On the funding cost side, I'd say the supply is still relatively strong and sufficient. Based on the current national situation from our funding partners, they have limited options to invest in. After 10 years, our risk level and capabilities in risk management are recognized and approved by them. Also, as you might know, we held our Corporation Conference Day with our funding partners, and all of them expressed willingness to deepen cooperation. As illustrated, our funding cost actually lowered in the first quarter and the overall supply remains relatively strong. I hope that answers your questions, Frank.

Operator, Operator

Thank you.

Jay Xiao, CEO

After 10 years, our risk level and capabilities in risk management are recognized and approved by them. We held our Corporation Conference Day with our funding partners, and they all expressed a willingness to deepen cooperation. Our funding cost actually decreased in the first quarter, and the overall supply remains relatively strong. I hope that answers your questions, Frank. Thank you.

Jamie Wang, IR Manager

In terms of our key strategies, there are four main ones. The first is the upgrading of risk management capabilities. We have been working on strategies to upgrade our structure and lower risk levels. We presented the management 2.0 system, which will significantly enhance our risk management capabilities when it's ready. We are making gradual adjustments to ensure a step-by-step operational upgrade. We continue to eliminate high-risk users, making it a common operational practice to routinely eliminate high-risk users. Secondly, we strive to differentiate ourselves in customer acquisition. As mentioned earlier, we have various scenarios like e-commerce, along with a strong offline team, which are advantages that will aid us in strengthening our capabilities. Third, we will continue refining operations to further increase customer lifetime value and operational efficiency. Fourth, we will continue implementing cost efficiency initiatives. As seen in the first quarter, we achieved prominent results with operational costs over the outstanding loan balance decreasing and net margin increasing to 11%. For the rest of the year, we aim to continue enhancing our profitability. Thank you for your question, Frank.

Operator, Operator

Thank you. Our next question comes from the line of Alex Ye from UBS. Please go ahead, Alex.

Alex Ye, Analyst

So, I'll translate for my question. First, regarding the loan volume run rate in April and May, could you share how it has changed sequentially so far? Also, how does the current growth compare to your earlier expectations? My second question is about your asset quality trend. Can you provide us with some early indicators of asset quality and the trend observed in April and May? Do we anticipate further improvements from this point? Thank you.

Jay Xiao, CEO

So, I'll translate for my question. First is on the loan volume run rate in April and May. Could you share with us how it has moved sequentially so far? And how does the growth you have seen now compare to your previous notation? Second question is on your asset quality trend. Could you share with us some of the early asset quality indicators and the trend in April and May, and do we expect further improvement from here? Thank you.

Jamie Wang, IR Manager

As you heard, for the second quarter, our guidance for loan volume was RMB63 billion to RMB63.5 billion. I can provide some month-over-month comparisons from the first quarter results. The number of applications-wise showed a minor peak in volume after the Chinese New Year, with February showing an 8% increase quarter-over-quarter, while March reflected a 2% month-over-month increase. As for May, we are seeing a minor decrease in the amount month-over-month as the COVID-related consumption demand slowed down a bit, but it is still in line with our management team's expectations.

Jay Xiao, CEO

We are noticing a slight decrease in the amount month-over-month for May due to a small decline in COVID-related consumption demand, but this aligns with our management team's expectations.

Jamie Wang, IR Manager

Regarding risk, we are seeing stability and discretion in the first quarter. Currently, early indicators for the second quarter show stability, but from the new loan perspective, the structure has improved significantly. The percentage of early-stage loans (R1 to R3) has increased while those in later stages (R6 to R8) have decreased. With the monthly new loan structure improving continuously, we expect our overall risk level to improve in the future, although there are still room for further optimization. Hope that answers your question, Alex?

Operator, Operator

Thank you. Our next question comes from the line of Yada Li from CICC. Please go ahead, Yada.

Yada Li, Analyst

Hello management. This is Yada from CICC, and my first question is about the lending model. Could you provide more information on the trends in credit facilitation and the risk-sharing model or tech-empowerment services for the future? Will there be any plans to increase the on-balance facilitation? Additionally, I would like to know about the recent updates and outlook for the new consumption business. That's all. Thank you.

James Zheng, CFO

I will take the first part of the question, and Jay will address the second part. The first part concerns risk-taking and profitability. Obviously, at the company level, we always try to achieve balance. It makes sense that if risks improve, then we would take on a little more, but if the risk worsens, we would do less to preserve profitability. Results reflect this in terms of the proportion of business where we take risks, which is in loan facilitation and revenue sharing in our tech-empowerment service. Currently, the revenue-sharing business doesn't involve much risk, accounting for roughly 26% of our operations, hovering between 20% to 30% for several quarters. We closely monitor overall macroeconomic data and our risk indicators; if the data continues to improve, it does not preclude us from taking on slightly more risk to enhance overall profitability.

Jay Xiao, CEO

In terms of the proportion of business where we take risks, which is in loan facilitation and revenue sharing in our tech-empowerment service, the revenue-sharing business currently involves minimal risk, representing about 26% of our operations, which has remained between 20% to 30% for several quarters. We closely monitor overall macroeconomic data and our risk indicators; if the data continues to improve, we may consider taking on slightly more risk to boost overall profitability.

Jamie Wang, IR Manager

As you know, we have our Lexin ecosystem. The overall increase has been strong, especially compared to other e-commerce peers in heavy competition. As I shared in the first quarter, not only the volume in GMV increased year-over-year, but also revenue and the number of cumulative trading customers grew significantly. Customers we serve in our e-commerce areas are mostly credit consumers. Given the current macroeconomic environment, ATR requirements are a bit higher, which provides opportunities for e-commerce to increase engagement slightly. Furthermore, e-commerce can help us with customer acquisition and retention in our main loan facilitation business. Next is our offline team. Our offline team relies on BD operations, and with the economy recovering, it helps reduce customer acquisition costs and manage risk levels. We see significant comparative advantages as online traffic remains expensive and less accessible. Our offline team enables us to evaluate customers more accurately as well as understand their willingness to retain them, especially with existing customers. We plan to invest more in our offline team to differentiate ourselves in customer acquisition and acquire better customers. Regarding our second empowerment SaaS business, we've accumulated 10 years of standardized capabilities. We've entered into partnerships with 5 to 6 significant banking and funding partners. This monetization of our past experiences will strengthen our cooperation and offer us lower funding costs. We believe the cooperation between aforementioned businesses will strengthen and become more interconnected in the future, which will help us differentiate ourselves among peers. I hope that answered your question, Yada.

Operator, Operator

Thank you. I'm showing no further questions. I'd like to turn the conference back to the management team for closing remarks.

Jamie Wang, IR Manager

Thank you again, everyone, for joining us. If you have further questions, please contact us via our contact information available on our IR website. Thank you. Thank you again, everyone, for joining us. If you have further questions, please contact us via our contact information available on our IR website. Thank you.

Operator, Operator

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.