Earnings Call Transcript - WDH Q3 2023

Operator, Operator

Good morning, everyone. This is from Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop's Third Quarter 2023 Earnings conference call. As a reminder, today's conference call is being recorded. Please note that the discussion today will contain forward-looking statements made under the Safe Harbor provision of the US Private Securities 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. Potential 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 statement except as required by any applicable law. Also, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP. Joining us today on the call are Mr. Shen Peng, our Founder, Chairman, and CEO; Mr. Yang Guang, Co-Founder, Director, Finance VP, and GM of International Business; Mr. Zhu Zetao, GM of Crowdfunding and Pharmatech Business; Mr. Chen Richard, Board Secretary. And we will be happy to take some of the questions in the Mandarin line at the end of the conference call.

Shen Peng, CEO

Hello, everyone. This is Shen Peng. Thank you for joining our third quarter 2023 earnings conference call. This quarter, the domestic economy in China is still in the recovery process. Primary factors, including adjustments in product policies, have temporarily impacted the life insurance business. With the improvement in industry transparency and generation coupled with gradual acceptance of new product policy in the market, the company believes that the life insurance industry is entering a new development stage. Facing both opportunities and challenges, the company actively responds to regulatory directions, striving to enhance business health and efficiency. For our certifications, the company leveraged its keen insight into user needs to qualify both service and product innovation capabilities, embracing industry change with our vision and dynamic approach. In the third quarter, the company continued to focus on creating value for users, achieving a resilient financial performance with approximately RMB6.9 billion in revenue, maintaining a profitable trend for the past seven quarters. Cash profit reached RMB36.3 million, showing our Q3 growth of 67% and demonstrating sustainable and high-quality development. With sustainable net profit and positive operating cash flow at the end of September in the context of continuous share repurchase and acquisition of Shenlanbao, the company is set to maintain our robust cash reserve and ability to achieve organic growth. The combined cash, cash equivalents, and short-term investments of RMB3.1 billion provide flexibility and stability for the company to navigate uncertainties and support long-term growth. Our business models performed well in the third quarter, consolidating our leading position in the industry. Thankfully, we have an insurance marketplace focused on enhancing quality, helping optimize the product metrics through excellent demand insights and quality improvements, and it continued to contribute stable net profit. Secondly, our Medical Crowdfunding platform continued to improve our service and risk control mechanisms, accumulating over 3 million patients with Waterdrop. Crowdfunding's transparency and credibility demonstrate the company's commitment to authenticity. The company adhered to the user-centric approach consistently enhancing service quality and advocating for the transformation of service-oriented consultants with the principle of users first service orientation. In terms of our digital clinical trial solutions business, the E-Find Platform continues to deepen the collaboration with well-known domestic and international pharmaceuticals, expanding the range of recruited disease types. Leveraging technological advantages, we are continuing to explore innovative opportunities in the pharmaceutical field. In addition, we continue to invest in R&D to empower business development. In the third quarter, the company iterated and upgraded our AI technology across various aspects of product operations and services. With the implementation of our technology, the company will also seek export opportunities to empower the industry. Meanwhile, the company continues to prioritize and enhance its ESG efforts, striving for sustainable development of the company and society. Various initiatives relating to environmental protection, employee rights, and corporate governance are systematically advancing. In September, the company collaborated with IIGF to initiate the online insurance industry ESG, directly contributing to the practice and developments of ESG information disclosure in the industry. In addition to business development, the company actively conforms to CSR. In August, due to the flood in Beijing, the Waterdrop Public Welfare Platform collaborated with well-known charitable foundations to assist the flooded area. The platform launched a topic on our homepage, and we donated many supplies to the Beijing Youth Development Foundation. As of September 30, 2023, the platform had collaborated with 112 public charitable organizations in areas such as serious illness assistance, emergency disaster relief, and education support, raising a total of over RMB1.3 billion with over 70 million participants. Leveraging our business and technology advantage, we actively participate in the construction of multilevel medical systems implementing one-stop system tools in many cities. In terms of share repurchase, as of November 30, 2023, the company has cumulatively repurchased about 38.5 million ADSs from the open market totaling around USD87.4 million. This reflects the company's strong confidence in our value and long-term sustainable development. The repurchased shares will continue to be used for ESOP to enhance internal dynamics and promote mutual growth with our employees. The above is a brief review of business performance in Q3. Although facing the challenging micro environment, we're fully confident in our results within the industry. Looking forward to the last quarter of this year, our strategies include, firstly, driven by online and digital transformation. The insurance business will continue to focus on user-centric development, striving to achieve long-term, healthy, and stable growth. Meanwhile, we will continue to enhance team efficiency consolidated by our business foundation and provide users with professional and self-service. Secondly, our corresponding business will adhere to a user-first integrated service model, leading the industry towards high-quality development. We will also maintain transparent operations and implement strict risk management practices. Thirdly, leveraging big data, our pharmaceutical business will continue to increase industry penetration globally in order to construct a long-term growth engine. We hope to utilize our ample cash reserves to seek cooperation and investment opportunities around the insurance and healthcare sectors. Lastly, the company will celebrate technological empowerment and enhance AI capabilities to build core technology competitiveness, thereby supporting the implementation of long-term strategies and empowering the industry. In summary, the company will continue to emphasize the value we bring, focusing on high-quality development, and advancing facility and organic growth, constantly expanding business boundaries to better deliver insurance and healthcare services to billions through technology.

Zetao Zhu, GM of Crowdfunding and Pharmatech Business

Thank you, and that's enough for Q3. Waterdrop Medical Crowdfunding platform has accumulated 445 million donors and supported over 3 million patients, raising over RMB61.3 billion. Both user numbers and underwriting amounts continue to grow. In Q3, the Waterdrop Operating Transparency Committee further enhanced platform interference. We have improved the underwriting information display page with four different models, such as inflammation discovery, platform verification, public confirmation, and bank discovery. These provide a more comprehensive representation of key details and enhance the consultant surveys. We conducted the first consultation service month in August with our consulting operations and released the retained book, significantly improving overall service quality and risk awareness. As a result, overall user certification rose to 98% and the NPL for funding increased from 55% to 70%. In Q3, we continued the transition to service-oriented consultants in 45 strategic hospitals nationwide. This approach has received high praise from both hospitals and patients. The platform will further improve the efficiency of service-oriented consultants while maintaining service quality. We hosted the first donor and fundraiser open day in September, aiming for more transparency, guarantee, and trust. The company's CEO, Shen Peng, and myself, together with donors and fundraisers, engaged in deep communication regarding underwriting service experience, enhancing transparency and authenticity. The company will continue to listen to user feedback and focus on technology innovation to enhance service efficiency and transparency; we will honor the trust of every individual. Our clinical trials and dimension business showed stable and healthy development during the quarter, generating quality revenue of about RMB27.6 million, representing a year-on-year growth of 16.7%. During Q3, the E-Find Platform expanded its collaboration with over 135 pharmaceutical and CROs, signing over 90 new projects and witnessing rapid expansion. Our exceptional ability to recruit and top project management collaborations with leading MNCs drove this quarter's success. The platform notably entered an exclusive recruitment project with a psoriasis clinical trial from one of the world's top five MNCs, additionally initiating supply processes with two other top five MNCs, anticipating full formal collaboration in Q4. The E-Find Platform continues to apply cutting-edge technology to accelerate new drug development, leveraging big data and structured information from clinical trial projects. The program uses an AI-driven matching system to enhance efficiency in connecting patients with suitable credits. In patient service, due to our wireless serious unit patient base, we have developed an efficient private domain platform centered on patient management and core expertise in medical service. The platform offers patient management and integrated services such as patient selection, medication management, medical service, innovative payment solutions, and data insights, providing digital marketing solutions covering the entire product life cycle. In Q3, formal collaboration began with a leading MNC focused on the health management of chronic disease patients. And that's all for now; I will turn the call over to Yang Guang for the next part.

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

Thanks, Zetao. Hello, everyone. I will now walk you through our financial highlights for the third quarter. Before I go into details, please be reminded that all numbers quoted here will be in RMB, and please refer to our earnings release for detailed information on our financial performance on both year-over-year and quarter-over-quarter bases, respectively. In Q3, despite a unique period of product assessment, the company demonstrated robust profitability. The company revenue was RMB686 million, a slight Q-o-Q increase from RMB679 million. Waterdrop reports that this is the first quarter consolidating the financial results of Shenlanbao along with the results from the insurance liability segments. Our insurance-related income was RMB619 million, showing a 3.7% Q-o-Q increase. The compounding service fee was RMB36 million. The clinical solution income was about RMB27.6 million, marked by a remarkable 60.7% year-over-year growth. Operating cost and expenses increased by 7.6% year over year but decreased by 4.4% in Q2. Operating costs decreased by 8.5% year over year to RMB313 million, mainly due to a RMB19.5 million decrease in the cost of one year of health insurance coverage related to the termination of mutual aid plans that occurred in the same quarter last year. A second reason was a RMB9.4 million decrease in referral and service fee costs. Selling and marketing expenses increased by 36.1% year over year to RMB187.7 million, primarily due to the consolidation of Shenlanbao, which generated S&M expenses of RMB28.1 million; a RMB14.4 million increase in marketing expenses to third-party traffic channels; and a RMB9.1 million increase in personnel costs and share-based comprehensive expenses. In this quarter, the company proactively adapted certain advertising strategies, resulting in an upsurge of RMB41.3 million due to a major decrease in marketing expenses to third-party traffic channels, partially offset by the consolidation of Shenlanbao. Selling and marketing expenses decreased by 8.2% sequentially. General and administrative expenses increased by 39.7% year over year to RMB114.6 million and rose by 19.4% sequentially, both Q-o-Q and year-over-year, due to the consolidation of Shenlanbao and the increase in professional service fees. R&D expenses decreased by 5.7% year over year to RMB73.9 million, primarily due to personnel costs and share-based comprehensive expenses. Adjusted net profit attributed to the company in Q3 was RMB74.8 million. The GAAP net profit was RMB36.3 million, and we have generated GAAP profit over the past seven quarters. As of the end of September 2023, the company's combined cash, cash equivalents, and short-term investments stood at RMB3.1 billion, indicating sufficient cash reserves. Overall, the business performance in Q3 was stable, and looking ahead, we will continue to focus on user value and sustainable high quality developments. Ladies and gentlemen, with that, we would conclude today's conference call. We do thank you for joining. Have a good time.