Earnings Call Transcript - WDH Q4 2022

Mona, Investor Relations Representative

Good morning. This is Mona, the Investor Relations from Waterdrop, and I'm happy to welcome everybody to Waterdrop's Fourth Quarter and Full Year 2022 Earnings Call. Please note that you're in a listen-only mode and today’s event is being recorded. Please also note that the discussion today will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Additional risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. The company does not undertake any obligation to update any forward-looking statements except as required under applicable law. Also, this call includes discussions of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP. Joining us today on the earnings call are Mr. Shen Peng, our Founder, Chairman and CEO; Mr. Yang Guang, Co-Founder, Director, Finance VP and GM of International Business; Mr. Ran Wei, Director, GM of the Insurance Technology Business; Mr. Yao Hu, GM of Crowdfunding and Pharmatech Business; Mr. Chen Richard, Board Secretary, and we'll be happy to take your questions in the measuring line at the end of the conference call.

Shen Peng, Founder, Chairman and CEO

Hello, everyone. Thank you for joining our fourth quarter 2022 earnings conference call. Looking back on 2022, the downside risks of the global economy and the resurgence of the pandemic put significant pressure on the domestic economy. However, as China made efforts to deepen stable growth and smooth the provision layer, the domestic economy and consumer confidence are currently showing a cycle recovery. Under the guidance of policies, the insurance industry has enhanced its focus on high-quality development and continues to emphasize patient operation. In the long term, the insurance industry will have great potential since the demand for insurance continues to grow. Meanwhile, the pharmaceutical industry is entering a new age, benefiting from the acceleration of clinical trials and innovation in business models. Facing headwinds, we anticipate pursuing sustainable developments by creating value for users, which our metric business aims to achieve. In the fourth quarter, our revenues maintained the profit stream of the last three quarters, increasing by 12.5% year-on-year. Our GAAP net profit reached RMB126.2 million in the fourth quarter and RMB608 million for the full year. We have delivered on our commitment to overall profitability through our established business in 2022. As of the end of December, our cash and cash equivalents and short-term investments amounted to RMB3.7 billion, increasing 3.2% quarter-over-quarter. Even taking into account our repurchase program, we expect to generate a positive cash inflow of RMB1.15 billion in the fourth quarter. Our ample cash reserves and ability to generate positive cash flow position us strongly to withstand the ever-changing environment and future-oriented demands. Our businesses are showing positive trends. Specifically, under the pressures of industry adjustments, the Waterdrop Insurance marketplace continues to contribute net profit and cash flow by enhancing our products and improving service capabilities. Our macro components have expanded their market share. It has taken only one year for the E-find patient platform to transform from a nascent business into an industry leader. In the fourth quarter, the revenue generated from E-find exceeded RMB22 million, increasing 20 times year-over-year. The annual revenue reached nearly RMB50 million, establishing E-find as our growth driver. Leveraging patient recruitment capabilities, we are also actively exploring opportunities in CRO and CMO. As an Internet company, we will continue to invest in R&D to build long-term growth. In the fourth quarter, we acquired the Intelligent Dialogue platform to empower our businesses, and we achieved good results in AI-based human projects, continuing to build technical capabilities to further reduce expenses and increase efficiency. In the fourth quarter, we actively implemented our share repurchase program, purchasing approximately 2.7 million ADS in total, and we are continuing to advance the one-year extension program. By the end of 2022, we had repurchased almost 8.4 million ADS from the open market for a total consideration of USD $12.4 million. This demonstrates our strong confidence in our corporate value. Meanwhile, we plan to reserve the repurchased shares for share incentive plans, aligning our employees' interests with the company. Although reviewing our business in the fourth quarter, we have confidence in both the industry and ourselves. Going forward, we will pursue high-quality growth with an emphasis on profitability. To achieve our goals, our strategies include: first, for the insurance business, we will adhere to digital transformation to expand user coverage and improve sales capabilities for sustainable product quality; second, we will increase investments in the pharmaceutical area to be long-term drivers; and third, leveraging our abundant cash reserves, we will pursue M&A and other opportunities in the insurance and pharmaceutical sectors while continuing to invest in R&D to empower the entire industry. Lastly, I'd like to emphasize that we will continue to optimize our operations and invest in user-centric development to enhance our industry-leading position fully. We recognize recovery, supported by policy and our ample cash reserves. Our insurance and other businesses continue to be on track, allowing us to deliberately capture market share. I will now hand over to Ran Wei to discuss the performance of the Waterdrop Insurance business in Q4.

Ran Wei, Director, GM of the Insurance Technology Business

Thank you, Shen Peng. Hello, everyone. Let me give you an update on our Insurance business. With the complex external environment, a resurging pandemic across the country, and softer consumer demand, coupled with adjustments in the life and health insurance industry, the growth rate of both year premium has not increased significantly. Against this backdrop, our first-year premiums amounted to RMB1.6 billion and the insurance-related revenue reached RMB611 million. However, as we invest in high-quality development, our insurance business remains relevant and continues to contribute profit. We have also found ways to improve our bottom line by driving better ROI and utilizing our budget more efficiently. In the fourth quarter, we enhanced the management of user safety by incorporating user experience and value projection into our business. The number of policies per capita increased by 18% quarter-over-quarter, and the chunk rate and renewal rate remain high at over 60% and 90%, respectively. The ATL (average transaction value) of existing users increased by 7% quarter-over-quarter, and we continue to improve operational efficiency. We proactively explored customer acquisition channels on various social media platforms, leading to an overall increase of 39% in new customers, with new regular accounts increasing by 166% quarter-over-quarter. We have achieved excellent quality, laying a solid foundation for further expansion. To streamline our operations based on current events, we identify users with high potential for consumption, and our sales team follows up promptly to provide them with financial consulting services. Leveraging the direct-to-consumer experience enables us to deliver high-impact content. The number of consumers on short video platforms increased by 321%. Additionally, we collaborated with industry players to enhance our sales fleet and innovative capabilities, resulting in a 60% increase in ATL quarter-over-quarter. Our online operational efficiency has improved customer acquisition and conversion while maintaining target growth. Delivering compelling creative content and enhancing user application capabilities, our network traffic increased by 36% quarter-on-quarter, while the average acquisition cost decreased by 17%. By fine-tuning our user commercial model, we've established a working mechanism for the insurance planner model, leading to a 140% increase in ATL quarter-over-quarter. In the fourth quarter, we experienced notable growth, with a year-on-year increase of 229%. We have expanded our operations to 11 cities across China, including Beijing and Shanghai. The synergy effects with online brokerage have accelerated the transformation of our business model. In terms of distribution channels, we made progress by onboarding 30 new partners this quarter. We focused on the exploration of the insurance planner model in the fourth quarter, providing users with in-depth service through enterprise WeChat. Medical insurance products have been a trigger to educate users and improve their insurance awareness, expanding to family and life insurance offerings. The ATL in December increased by 60% compared to October. Concerning our progress in innovation, we explored user needs and developed many new insurance products. For instance, we launched a customer-centric product tailored for patients. Another example includes a post-accident insurance program that has exceeded RMB10 million, setting a benchmark in the market. We have also upgraded medical insurance products and are exploring early screening for cancer and anorectal diseases. We partnered with two new divisions this quarter and are looking to broaden the depth of cooperation with certain insurers, such as online insurance with United. As a technology company, we remain committed to our investments in AI-driven innovation, which lays a strong foundation for our medium- and long-term growth. We released a robust configuration platform under a new architecture, enhancing our capabilities to optimize our intelligent sales matching system. We continue to strengthen our risk control capabilities with AI and improve operational efficiency. In Q4, we successfully integrated and deployed our industry-leading AI system with selected products to streamline sales and enhance communication with customers. This concludes my update on our insurance products. I will now hand over to Yao Hu for an update on the medical crowdfunding and patient recruitment business.

Yao Hu, GM of Crowdfunding and Pharmatech Business

As of the end of Q4, a cumulative total of 426 million has helped save 2.7 million patients with around RMB57 billion on our platform. In this quarter, operational transparency has improved further. For instance, we released a monthly bill that includes an overview and breakdown of funds raised on our platform, which marks achievement of transparency, not just for single campaigns but overall. The billing system includes detailed accounting from refunded and refused funds, showing cash flow from donors to fundraisers. Moreover, we provide monthly detailed billings of cases to enhance public oversight and monitoring. We ensure full disclosure of key review procedures and their corresponding results via Weibo. Specifically, when a fundraising campaign is initiated, we identify and intercept various scenarios, including concerning financial conditions, personal information usage, and potential compliance issues. On the other hand, we are managing the fundraising process, where any campaign related to fund use, bank accounts, and medical bills is actively monitored. We will publicize our rationale and decisions to help build user confidence in commercial outcomes across various scenarios, thus enhancing recovery transparency. In Q4, the development of clinical trials was impacted by the pandemic across the country, resulting in delays for many clinical trials. We are leveraging our extensive coverage and capability to quickly and accurately recruit patients. The E-find patient platform has involved nearly 700 patients in over 200 clinical trials, significantly accelerating trial progress for our partners. Our industry reputation and excellent project performance have led to an ongoing increase in the number of clinical trial programs, with nearly 18 new programs launched this quarter. By the end of Q4, we have collaborated with over 100 pharmaceutical companies. We are also nurturing relationships with our regular clients and continuously expanding collaboration. For example, E-find partnered with innovation in early 2022 for patient recruitment in a specific tumor clinical trial needing patients with qualifying factors, such as genetic mutations. Utilizing our patient core and digital capabilities, we enrolled many patients quickly, significantly improving trial outcomes. Consequently, as a result of this success, E-find and the Beijing organization have deepened their collaboration with five new projects launched this quarter. Looking ahead, we promote cooperation with leading global pharmaceutical companies and expect to finalize agreements in 2023. Moreover, we upgraded the ecosystem among pharmaceutical companies, doctors, and patients, focusing on healthcare digitalization and operational potential. We are investing in R&D in the medical field while upgrading our outsourcing business, with our medical algorithm platform covering nearly all diseases, enabling us to extract criteria and relevant information to improve operational efficiency. The algorithm helps to enhance first-time success rates for online claims, showcasing synergy between our pharmaceutical and insurance businesses.

Yang Guang, Co-Founder, Director, Finance VP and GM of International Business

Thank you, Yao Hu. Hello, everyone. I will now walk you through our financial highlights for the fourth quarter and full year of 2022. Before I go into detail on financial performance, please be reminded that all numbers quoted here will be in RMB as stated in our earnings release for detailed information on our comparative financial performance on both a year-over-year and quarter-over-quarter basis. Despite the challenging external environment, we invested in high-quality development. Our net operating revenue increased by 12.5% year-over-year to RMB639.5 million, primarily due to the rise in insurance-related income, crowdfunding service fees, and digital clinical trial solution income. The operational costs and expenses decreased by 10.5% year-over-year and 5.2% quarter-over-quarter, totaling RMB606.6 million, driven by financial guidelines implemented in the third quarter of 2021. To break this down, operating costs were RMB278.6 million, up by roughly 41% year-over-year, chiefly due to the increase in professional and outsourced customer service costs, totaling RMB51.2 million, and a recording of crowdfunding-related service costs around RMB67 million, shifting from sales and marketing to operating costs as we started generating crowdfunding service income since April 2022. This was partially offset by an RMB41 million decrease in personnel costs for our consultants and agents team. On a quarter-over-quarter basis, operating costs decreased by 18.4% due to reduced professional and outsourced customer service costs by around RMB25 million. Sales and marketing expenses dropped by 42.8% year-over-year to RMB137.8 million, mainly from an RMB36 million reduction in marketing expenses for third-party traffic channels and an RMB18 million decrease in sales and marketing service costs. Our G&A expenses fell by 20.7% year-over-year to RMB118.6 million due to decreased impairment loans offset partially by increased allowances for doubtful accounts and a rise in personnel costs. On a quarter-over-quarter basis, G&A expenses surged 44.5%, largely due to increased allowances for doubtful accounts, professional service fees, and share-based compensation expenses. In this quarter, R&D expenses decreased by 21.2% year-over-year and 8.5% quarter-over-quarter to RMB71.7 million, primarily due to reduced personnel costs. In Q4, we reported a non-GAAP profit of RMB155.7 million and a GAAP profit of RMB126.2 million, compared to an adjusted net profit of RMB5.9 million for the same period in 2021. The profits we generated over the past five quarters illustrate our determination and achievements in cost discipline and profit enhancement. As of December 31, 2022, our cash and cash equivalents and short-term investments increased 3.2% quarter-over-quarter to RMB3.7 billion, continuously expressing positive operating cash flow. In conclusion, we remain committed to our financial guidance, aiming for a non-GAAP profit in mid-2022. Going forward, we will sustain efforts on our business, enhance government policy, and adapt cost reduction strategies. Our competent resilience is evidenced by ongoing business momentum, and most importantly, our team's unwavering commitment to delivering best-in-class service to our customers. Ladies and gentlemen, with that, we will conclude today's conference call. Thank you for joining.

Operator, Operator