Earnings Call Transcript - LX Q3 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the LexinFintech's Third Quarter 2022 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 would like to hand the conference over to Ms. Echo Yan, IR Director of LexinFintech. Thank you. Please go ahead.

Echo Yan, IR Director

Thank you, operator. Hello, everyone. Welcome to Lexin's third quarter 2022 earnings conference call. With us on the line today are our CEO, Jay Xiao; President, Jared Wu; and the CFO, Sunny Sun. 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 performance, Sunny will cover the financial results in more detail and lastly, Jared will discuss risk management. I'll now turn the call over to Jay. His remarks will be in Chinese, and then English translation will be followed. Jay, please?

Jay Xiao, CEO

Hello, everyone. It is my pleasure to speak with you again. In the third quarter, due to a variety of COVID resurgence and somewhat pressured macro economy, we achieved results that not only continued the recovery trend but also showed positive changes from the past. Our second and third quarter results demonstrated that our previous obstacles moved us onto a sustainable track of clear change for the better. Our loan volume exceeded the previous guidance at RMB53 billion, reaching RMB56.2 billion for the last quarter, representing an increase of 14% quarter-over-quarter. Revenue was at RMB2.7 billion, representing an increase of 12% quarter-over-quarter; net profit was at RMB280 million, representing an increase of 65% quarter-over-quarter; overall outstanding loan balance was at RMB94.6 billion, representing an increase of 9% quarter-over-quarter; total registered users were at 180 million, representing an increase of 19% year-over-year. Since the beginning of this year, our asset quality, funding costs, and loan volume improved quarter-over-quarter, providing improvement in our profitability. Net margin improved steadily from 4.8% in the first quarter to 10.2% in the third quarter. The improvement continued in the fourth quarter based on our confidence in strategy; thus, the company’s repurchase program remains in execution. As of September 30, 2022, the company had repurchased approximately 20 million ADSs for approximately US$44 million under this repurchase program. In addition, a new share repurchase program has been authorized under which the company could purchase up to an aggregate of US$20 million over the next 12 months from November 17, 2022. Our ongoing recovery trend is accomplished. Thanks to our asset quality prioritized strategy that has been defined consistently, which is lowering our risk level, refining operations, and backing asset quality to the improvement of profitability. In particular, asset quality will continue to strengthen our risk management team by introducing several industry talents joining us this quarter. We have also strengthened our investment in data and models to continuously improve the accuracy of risk identification, and I would like to elaborate on these subjects now. On the acquisition front, in the third quarter, we reinforced our online customer acquisition capabilities by leveraging external data resources and deepening cooperation with our advertisement partners to generate over 30 customer acquisition models. For the last quarter, our acquisition went down 14% year-over-year, and new customer per capita increased by 31% in September compared with that number in June. In terms of customer risk management, we continue to enhance our capabilities into a more refined operation in customer management by incorporating external data resources with our own database, which contained many years of data, and increased our data abundance by 30%, extending the degree of direct connection for the use of credit reports from PBOC and derived nearly 400,000 risk identification dimensions. Additionally, we established and perfected a new risk model based on different trading patterns, increasing its accuracy by 10%. On the operational strategy front, we followed our priority in exploring the potential of our qualified customers to whom we provided higher quality lines and lower interest rates, boosting their contribution in value throughout their life cycles. Meanwhile, we are continuing the steady reduction of high-risk customers to further stabilize our risk levels. Through these approaches, our asset structure improved significantly in the third quarter. Low risk customer loan origination volume increased by 17% quarter-over-quarter, and average contribution increased by 44%. The ARPU of our active customers increased by 33% year-over-year, and the incremental scale of loan origination conversion of the existing users exceeded RMB2 billion. In the third quarter, the 30-plus day delinquency rate was 4.61%, which decreased by 0.24 percentage points quarter-over-quarter, while the 90-plus day delinquency rate was at 2.66%. The day-one delinquency rate has continued to decrease quarter-over-quarter, while the 30-day collection rate was maintained above 90% with a steady increase. All these improvements have been achieved through optimization of data and technology capabilities, which has always been the core driving engine of the development of the company. In the third quarter, research and development expenses were at RMB140 million, a 7% increase year-over-year, continuing to lead in the industry. The smart business engine continued to be upgraded. In terms of system capabilities, we established mechanisms such as our user LTV model and intelligent attribution scheme. We increased the coverage of agile business scenarios to 100%, which quickly improved decision making and operational efficiency. In terms of AI applications, we strengthened the exploration of deep learning to identify user risks from more dimensions and improved the risk identification ability of new customers by 20%. A series of marketing models based on federal learning and joint modeling has improved the marketing conversion of new and existing customers by more than 35%. Let me also touch on our business ecosystem surrounding our three main businesses. The Double 11 e-commerce festival has just passed, and our Fenqile platform delivered an encouraging performance. From October 24 to November 12, total GMV increased by 97% year-over-year, and the number of transactions and users increased by 94% and 70%, respectively. Benefiting from the consumption scenarios of the Fenqile platform, our installment consumption scenarios led by Le Hua Card reached a 15% increase year-over-year in transaction volume and ARPU of transaction uses increased by 30% year-over-year. Leveraging the advantages of consumption scenarios and focusing on high-quality customer operations, our new consumption-driven local-based service business has continued to grow this year. Lexin's address in consumption scenarios and the core capabilities of data analysis and technology keep its progress in integrating with the business, thus forming a circular enhancement task. Our high-frequency consumption-driven local-based business has opportunities to generate high-quality customers for credit-driven business. Accumulated technology and risk management experience enable us to provide services to our financial institutions and merchants, promoting the synergetic development of our technology-driven platform business. This synergetic development makes Lexin connected with more funding pools and creates a cycle of benefits, thus forming Lexin's unique business ecosystem with three diversified revenue drivers allowing us to robustly respond to the complex and changing external environment. Let me spend a few minutes to update you about Lexin's corporate social responsibility initiatives. In the second quarter, we launched a program to help SMEs deal with their cash liquidity challenges, which continues. The total amount of small and micro loans was RMB5.4 billion in the third quarter. For SMEs, particularly affected by the pandemic resurgence, we took several measures to help them navigate through difficulties. Additionally, we upgraded our customer protection initiative in the fourth quarter by launching the 5S Guardian system, which utilizes AI technology to strengthen data security, anti-fraud protection, conduct standards, customer service, and combat financial scams. Collectively, the 5S system allows us to build a comprehensive security firewall for customers. Looking into the future, we remain optimistic and will pursue continued sustainable quality development. We aim to establish eight offline stores or even real business development; our advanced fintech technologies will provide support to young people and SMEs. We will continue to strengthen our underlying capabilities, optimize our customer segmentation operation strategy, and improve profitability by reducing costs while increasing efficiency, thus preparing us for any future challenges and uncertainties. We expect to maintain the current momentum in the fourth quarter, and our loan origination is projected to align with the volume of this quarter. Let me now turn the call over to our CFO for financial updates. Thank you.

Sunny Sun, CFO

Thank you, Jay. Good morning, and good evening, everyone. It is my pleasure to speak to you again. I am excited to report that despite external uncertainties, our third quarter performance continued with an upward trend guided by our principle of pursuing sustainable and quality growth. We continue to build a diversified revenue structure, advanced risk identification capabilities, and operational efficiencies. Our ongoing efforts in technology innovation and digital transformation have also contributed to achieving our Q3 performance. Now let me go through some key financial and operational metrics with you. Total loan origination in the third quarter was RMB56.2 billion, representing a 14.4% growth quarter-over-quarter. The outstanding loan balance was RMB94.6 billion, delivering a 9.2% increase compared with the last quarter. If we look at the results at the end of fiscal year 2021, our outstanding loan balance as of Q3 increased by 10.1%, demonstrating the ongoing resilience of our business. We are delighted to see the positive momentum of both our loan origination and outstanding loan balance has continued for two consecutive quarters, and based on current information, it is on course for the rest of the year. While driving solid growth continuity, we are closely monitoring potential saturations from external factors, such as COVID resurgence-related economic impacts, and are confident that we can make necessary adjustments if needed. At this point in time, management believes quality over quantity is the right approach to sustain a healthy business status. Total operating revenue was RMB2.7 billion, achieving an 11.5% increase quarter-over-quarter. Revenue from new consumption-driven location-based services was RMB525 million, an increase of 31.3% from the same period last year, with a modest decrease of 2.5% quarter-over-quarter. It is worth noting that the June 18 online shopping festival made a meaningful contribution to Q3 revenue. Revenue from technology-driven platform services was RMB500 million, representing a 14.6% increase quarter-over-quarter. Revenue from credit-driven platform services was RMB1.7 billion, delivering a 15.8% increase quarter-over-quarter. I'd like to emphasize that we have reorganized our revenue segmentation since Q1 of this year, which we believe better reflects the diversity and resilience of our revenue and the nature of our business. Once again, the contribution from our credit-driven services was about 40% of the total revenue this quarter, reaching RMB1 billion, achieving a 5.1% increase quarter-over-quarter. This aligns with our strategic goal of creating a high-quality and complementary revenue structure, which better positions us to face future external challenges in the long run. In compliance with government guidance, loan pricing in Q3 continued to fall, moving closer to 24%. The mix within 24% APR was above 80%, similar to the last quarter. Moving on to the expense side, sales and marketing expenses decreased by 11.1% quarter-over-quarter and by 13.5% year-over-year to RMB425 million. This is a strategic decision by management to maintain prudent spending in light of uncertain trading conditions. However, we are reaching our customers more effectively through various online and offline channels, thanks to our digitalized and data-driven marketing program. Research and development expenses increased by 7.3% year-over-year to RMB141 million, reflecting our continuous investment in upgrading our technology capabilities. G&A expenses decreased by 7.7% quarter-over-quarter to RMB104 million. While loan origination and top-line revenue continued their upward trend this year, our G&A expenses have remained stable and decreased on a quarter-over-quarter basis for two quarters. I am particularly pleased to note that the net profit for Q3 was RMB276 million, achieving a significant 64.4% increase quarter-over-quarter. It is encouraging to see that our profitability has sustained its strong recovery trend quarterly. While major risk indicators remained stable, we expect net profit to further improve in Q4 based on current external conditions. On March 16, 2022, the company's Board of Directors authorized a US$50 million share repurchase program. As of Q3, the company had repurchased approximately 20 million ADSs for about US$44 million under this program. The Board has also authorized a new US$20 million repurchase program. However, prioritizing and concentrating resources on strategic and meaningful performance-related initiatives will be our guiding principle. We will continue to pursue a sustainable and resilient business approach and remain alert to any material signs of external changes that may impact our business. We are confident that we are well-positioned to react quickly and responsibly. With that, I will turn the call over to our President, Jared Wu, who is overseeing the risk department. Jared, please.

Jared Wu, President

Thank you, Sunny. Good morning, and good evening, everyone. It is a great pleasure to speak to all of you today. Now let me elaborate on the risk management performance of our business. Last quarter turned out to be a quarter of improvement amid market uncertainties and the residual impact of sporadic COVID resurgence. We are witnessing a continued decrease in the day-one delinquency rate as of the end of September, and our 30-plus day delinquency was at 4.61% this quarter, representing a decrease of 0.24 percentage points from the last quarter. Our 90-plus day delinquency held relatively steady at 2.66% this quarter, which was consistent with our prediction. We expect that the impact from the previous quarter's COVID restrictions has subsided, and our 90-plus day delinquency stabilized in the third quarter. Should no interruptions from external forces occur, we are cautiously optimistic that our delinquency metrics will stabilize and go on a downward trend, while overall risk levels continue to improve favorably. In the last quarter, further focusing on high-quality users and boosting their contributions has been one of our priorities. We have strengthened the quality and breadth of our data resources and enhanced our use of credit reports from the PBOC while further refining our segmentation model for different user profiles. These measures helped us more accurately identify high-quality users and offer them lower interest rates. Despite the challenges brought about by the pandemic's resurgence, we established a risk monitoring and targeted strategy adjustment mechanism for pandemic areas, and this system has matured to the point where we can adjust our pre-landing, mid-landing, and post-landing strategies according to conditions in each pandemic area, which has been critical in enhancing our risk performance this quarter. As we continue to enhance our risk management process, our refined capabilities have made significant progress in the past two quarters. We actively attracted numerous talented individuals within the industry while accelerating the upgrade of various risk management models and increasing investments in data resources. All these initiatives have yielded early positive results in addressing customer acquisition, asset management, and risk performance. Moving forward, we will continue to bolster these initiatives to further enhance our risk management capabilities and improve our asset mix and risk performance. Thank you. This concludes our prepared remarks. Operator, we are now ready to take questions.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from the line of Hans Fan from CLSA. Please ask your question.

Hans Fan, Analyst

I got two questions. First of all, this is Hans Fan from CLSA. Congratulations on the improvement in results on a quarterly basis. My first question is on regulation, and the other one is on APR. Can you give us some updates regarding the regulatory process, especially the decoupling of the data feeds to the banks? Noticing also some signs of changes in China FinTech regulation, I am curious about our progress there. The second question is about the APR. Our APR has been decreasing over the past few quarters, based on regulatory requirements and adjustments to our customer base. What is the outlook for the APR, and what was the exact APR in the third quarter? That's my question. Thank you very much.

Jay Xiao, CEO

Let me take the question. The first one is about the regulations. We are not currently on the list for the first batch. Hence, there are no specific requirements for our company at this moment. However, we are closely following the situation to understand what the specific requirements are for the first batch. Meanwhile, we are maintaining close communications with two vendors in the industry and are aware of their solutions. We have already outlined our plans, and as soon as the requirements from the authorities are clear and the current plans are approved, we can take quick action to comply. As for the APR in this quarter, it is very close to 24%—24.3%, only slightly above 24%. The pricing above 24% is very limited, and we will continue to further decrease our APR. We believe that as we increase the percentage of our high-quality customers and improve our asset quality, our pricing will continue to decline. In our view, higher quality customers lead to better asset management, which aligns with further decreases in our APR. Only with a better APR can we attract higher quality customers.

Hans Fan, Analyst

Thank you very much.

Operator, Operator

Great. Thank you. Our next question comes from the line of Frank Zheng from Credit Suisse. Please ask your question, Frank.

Frank Zheng, Analyst

This is Frank from Credit Suisse. Thank you management for the opportunity to ask questions. I have two questions. The first one is about credit quality. We see that in this quarter the 90-day delinquency has remained flat, while the 30-day has started to improve, and the company suggested that credit quality is likely to improve going forward. If this trend continues, should we anticipate sizeable reversals on provision expenses in the next few quarters? My second question is on funding costs. This quarter, funding costs improved by 20 basis points. What is the main driver behind this? Also, we have seen some marginal tightening in the monetary market recently. Should we expect further optimization of funding costs in the fourth quarter? Thank you.

Sunny Sun, CFO

I will translate myself for the English-speaking audience. Regarding the first question, we are pleased to see that our asset quality has remained stable and is on an upward trend. However, we might not be in a position to comment on significant reductions in provisions due to uncertainties in the external environment, particularly the economic impacts from COVID resurgences. We do see the possibility of some reduction in provisions, but we think that it will generally remain stable for now. Concerning the second question regarding the drivers behind funding costs, we are pleased to note a 20 basis points reduction this last quarter, due to favorable government policies on one hand, and also the close cooperative relationships we've built with our partners over the years. Thus, this improvement is a result of both factors.

Operator, Operator

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

Alex Ye, Analyst

So I will translate for my question. The first one regards our customer mix migration. I’ve noticed that our per customer loan volume and take rate have significantly increased quarter-over-quarter. I presume this is largely driven by the upgrade of our customer mix. However, I would like more details on what percentage of our high-quality customers, per our definition, have changed quarter-over-quarter and what is our outlook moving forward? The second question is on take rates. Given our ongoing customer mix appraisal, what has been the impact on our take rate? Specifically, I want to know more about take rates for this quarter from a new volume perspective, and how it compares to our overall take rate from our total portfolio. Can we infer that we've likely seen the bottom of our take rate? Thank you.

Jay Xiao, CEO

Talking about premium or high-quality customers, we classify our customers across different risk levels. Currently, we focus on levels one to three as our major target high-quality customers. We are further understanding and engaging with our better-performing customers—re-engaging our original users. In the future, we aim to provide better services based on our insights into current high-quality customers while actively reducing high-risk customers. Our categorization for high-risk customers ranges from levels six to eight. We believe our overall risk management and asset structures will continue to be optimized. Regarding the take rate, we anticipate that with continued improvements in our risk management and asset structures, our take rate will trend positively in the future. Initially, we expected our overall take rate for the year to be at about 3%. Currently, those projections have changed.

Operator, Operator

Thank you. There are no further questions. I'd like to turn the call back to the management team for closing remarks.

Echo Yan, IR Director

Thank you all for joining us today. If you have further questions, please contact us. Our contact information is available on our IR website. Thank you.

Operator, Operator

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