Earnings Call Transcript - WDH Q1 2023

Lee Hongjing, Unknown Executive

Good morning, everyone. This is Lee Hongjing from Waterdrop Investor Relationships. It's my pleasure to welcome everyone to Waterdrop's First Quarter 2023 Earnings Conference Call. As a reminder, today's conference call is being recorded. Please note that discussion today will contain forward-looking statements made under the safe harbor provision of U.S. Private Securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties and may result in results that 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 statements, except as required by applicable law. Also, the call includes a discussion of certain non-GAAP measures. Please refer to our earnings release for reconciliations 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, SVP and GM of International Business; Mr. Ran Wei, Director, GM of Insurance Technology business; Mr. Zhu Zetao, GM of Crowdfunding and Pharmatech business; Mr. Chen Ruichen, Board Secretary. And we will be happy to take some of the questions in the manner in line at the end of the conference call.

Shen Peng, CEO

Hello, everyone. This is Shen Peng. Thank you for joining our first quarter 2023 earnings conference call. After the adjustment of the pandemic control policies, there was a peak period of domestic infection in January. Combined with the impact of the spring festival holiday, which briefly brought external headwinds to the industry. However, as the impact of the pandemic and holiday subside, the domestic macro economy shows signs of recovery and the overall trend of the insurance and pharmaceutical industry is gradually picking up. In the long term, as the insurance customer base gradually becomes younger and the distribution becomes more separated, the life insurance industry is significantly shifting towards online and intermediary direction. Additionally, as hospital outpatient determinations return to normal, clinical trial projects continue to operate. The overall demand for new drugs and research and development will further increase. In the first quarter of 2023, the company continued to focus on creating value for our users and pursuing healthy development. The business performance remains robust with the company's revenue reaching RMB 606 million in the first quarter, carrying over the upward trend for the last whole year. The net profits in the first quarter were RMB 49.7 million, demonstrating the sustainable and high-quality development of the company's operations. With sustained positive net profit, the company maintains ample cash reserves. As of the end of March, the company had a total of RMB 3.6 billion in cash, cash equivalents, and short-term investments. The bond and cash reserves help the company to face the uncertain environment with more confidence and support our long-term planning and layout for future growth. All of our business models achieved strong performance in the first quarter, continuously consolidating our leading position and influence in the industry. First of all, the order of the insurance marketplace adheres to promoting insurance product diversification and innovation. Meanwhile, we moderately increased investments in third-party traffic channels in the first quarter. And we consistently optimize our existing customer operations. Thanks to the efforts of our colleagues, there was a quarter-on-quarter growth in FYP, and our Waterdrop insurance business continued to contribute stable net profits to the company. In addition, our Waterdrop Medical Crowdfunding platform continuously enhanced service and risk control capabilities. We actively collaborate with various stakeholders, such as judicial departments, hospitals, and industry to crack down on dishonest fundraising activities. This initiative was highly recognized by the industry. In our Integrity Beijing 315 Gala, the company was honored as an Integrity Commitment Enterprise for the consumer new force in 2023. Lastly, in terms of the digital clinical trial solution business, due to our excellent performance in contract fulfillment, the E-find patient platform gained recognition from domestic and international partners. We continue to expand the range of recruit disease types, thereby accelerating drug development for pharmaceutical companies. We will keep exploring innovative opportunities in the field of CRO and pharmaceuticals. Along with business development, the company continues to invest in research and development. In the first quarter, the company closely followed developments in the AI industry. We further upgraded AI-powered dialogue chatbots and relevant technologies. As a result, we improved our marketing capability, serviceability, and risk control competence, thus facilitating and improving our business efficiency. The company also actively explored cognitive technology, building a sound foundation for expert technology. As of the end of May 2023, the company has cumulatively repurchased 24.9 million ADS shares on the open market with cash for a total consideration of approximately USD 61.2 million. We will continue to execute the 1-year extension program announced in September 2022. This demonstrates the company's current confidence in our own value and long-term sustainable development. Meanwhile, we plan to reserve those shares for employees, which will further motivate our workforce. Above is a review of our business in the first quarter, and we remain fully confident in the industry and our own development. Down the road, we will continue to pursue high-quality growth with the premise of profitability. To achieve our goals, our strategies include: firstly, for the mature insurance business, we will insist on being user-centric to deliver more professional online service, improve sales capability, and achieve profitability at scale. Secondly, we will actively explore the rapidly growing pharmaceutical business with the goal of rapidly penetrating domestic and international pharmaceutical markets and building new growth engines in the long run. Thirdly, leveraging our abundant cash reserves, we will seek partnerships and merger aggregation opportunities around insurance and pharmaceutical sectors. Lastly, we will continue to invest in R&D and seek to empower the industry. In conclusion, the company will continue to prioritize user centricity and create value for our users. We will further strengthen our existing business advantage. We are maintaining an entrepreneurial message to pursue high-quality growth and business innovation. We will continually bring insurance and health care services to billions through technology. I will pass it to Ran Wei to discuss the performance of the insurance business this quarter.

Ran Wei, GM of Insurance Technology Business

Thank you, Shen Peng. Hello everyone. Let me give you an update on our insurance business. In the first quarter, the life insurance market shows some growth, and there was a noticeable increase in precautionary savings demand. In this setting, we continue to enhance operational efficiency and business health, optimize operations for existing customers, and actively explore new channels while adhering to product innovation. This lays a solid foundation for the long-term sustainable growth of our business. For the first quarter of 2023, the first year premiums generated through our Waterdrop insurance marketplace amounted to RMB 1,692 million, an increase of 6.3% quarter-on-quarter. Our insurance-related income amounted to RMB 536 million. In the first quarter, leveraging algorithms, our short-term insurance continued to improve in product offering, channel efficiency, and content innovation. In order to better serve our clients, we offer differentiated user service to a wide range of users and steadily enhanced business engagement. Furthermore, we upgraded service capability in policy renewal, improving user experience and value perception, and further improving the short-term insurance policy renewal rate. Overall, FYP of our short-term insurance increased 6.4% quarter-over-quarter. As for long-term insurance, we focus on user value and boldly innovated in user service, leading to a further increase in insurance premiums contributed by enterprise WeChat. The LPG maintains industry-leading capabilities in fine business operations and further activity per capita. We invest in new talent while improving performance in our branches. As a result, there was a 27% increase in productivity per capita, and the number of policies per capita increased by 14% quarter-over-quarter. While achieving rapid growth in personal productivity, the company maintained strict control over user service and policy quality, resulting in a 2% quarterly increase in the first-year renewal rate of our long-term insurance policies. In terms of user acquisition based on our existing strengths, we further expanded our capability and saw a 3% quarterly increase in the overall number of new users. In particular, we kept strengthening our end-to-end operational ability through video channel customer acquisition, resulting in a 111% increase in insurance premiums compared to the previous quarter. In the first quarter of 2023, Waterdrop continued to explore new block trade channels, such as online brokerage, offline brokerage, and insurance planner to facilitate sustainable business growth. From the perspective of meeting user value, our online brokerage kept enriching its product portfolio, resulting in a quarter-on-quarter increase of 83% in the number of reserved products across all insurance categories. With our precise user targeting ability, the cost of customer activation saw a decrease, with an 80% quarter-on-quarter reduction in cost per deal. Our service capabilities significantly improved with a 396% increase in EPO, which means average premium per lease in March compared to the last quarter, and a 7.9-fold increase in standard premium per capita from January to March. In this quarter, the new business premiums for offline brokerage increased by 48.8% year-on-year. Premiums by active brokers increased by 21.9% as the average policy per active worker increased by 22.5% on a quarter-over-quarter basis. As offline brokerage business matured, we emphasized organizational structure, improving business quality and refining the brokerage model. In the first quarter, we initiated a pilot project to promote the enterprise WeChat insurance model in multiple cities, driving the upgrade of service quality by optimizing the service for insurance planners. APL in March increased 70% compared to December 2022. At the same time, the company increased talent investment and controlled ROI, leading to a 182% increase in standard premium procurement from January to March. In the first quarter, Waterdrop insurance marketplace continued to enrich its product offerings and tailor products targeting specific user groups. For a tutor's insurance products, we customized outpatient medical insurance for children which covers outpatients, inpatients, burns, vaccination, fractures, dental repairs, and expanded coverage for child leukemia. This product extends to cover items that parents are more concerned about and provides more comprehensive protection. Targeting a licensed product, we launched a licensed prevention insurance combining protection and relevant health management service, cooperating with Beijing Tongan Hospital and United Family Healthcare on this feature product. To address the insurance needs of the elderly population aged 35 and above, we introduced several key products such as senior long-term charity insurance and malignant tumor insurance. Furthermore, we have achieved innovative progress in insurance for customers with pre-existing conditions. In the scenario-based insurance category, we successfully launched salary card insurance, which achieved traction in the hospital operation model. The FYP of this product has achieved consistent growth of 100% or more for three consecutive months while maintaining a low claims rate compared to the industry average. The premium of the industry-first leukemia relapse insurance exceeded RMB 1 million in FYP in Q1. In addition, we are developing long-term critical illness insurance for chronic kidney disease and comprehensive cancer relapse insurance for various high-incidence cancers. This product will be introduced to the market to benefit more individuals with pre-existing conditions. We will sustain our R&D investment in the insurance business, fostering solid growth for our medium and long-term growth. Firstly, we continuously emphasize our focus on R&D to keep up with the latest achievements in AI, consistently upgrading and integrating our AI capabilities. This will enhance service efficiency and support the needs of our staff via dedicated chatbots in various business scenarios. Our employees can further enhance the service capabilities to benefit our clients. Additionally, we utilized AI capabilities, improving precision in marketing and private operational tasks. In the marketing domain, we built a stable and efficient matching system, empowering AI with more decision-making authority in lead matching, increasing the ATL ratio by almost 12%. In an important model of marketing, our private domain operation via enterprise tool has achieved continuous optimization and user retention improvements. We emphasize self-R&D while also exploring the export of our technology capabilities to empower industry partners. In the first quarter, we integrated and upgraded our sales management and interactive systems, significantly improving the efficiency of management. We have made significant progress in sales management tools, data centers, and other functional models that enable us to provide a comprehensive solution to our partners. This concludes my briefing on the insurance business.

Zhu Zetao, GM of Crowdfunding and Pharmatech Business

As of the end of Q1, we accumulated a total of 432 million from our medical crowdfunding platform, exceeding 2.86 million patients with around RMB 38.4 billion on our platform. The overall number of users is on the rise, demonstrating an upward trend. In this quarter, the Operational Transparency Committee focused on the rising target and the regulation of consulting services, optimizing and improving our operational capabilities regarding the determination of the reasonableness of the rising targets. On one hand, the committee strengthened its ability to identify medical materials, allowing for more accurate filtering of duplicated material and photoshopped information. On the other hand, we optimized medical risk control measures for variable scenarios, including rare diseases and complex treatment plans, achieving intelligent auditing of underwriting targets. Additionally, in the initial review process, we enhanced the medical risk control audit to ensure proper fundraising amounts, timing, and accuracy. This enhances the regulation of consulting services. The Operational Transparency Committee established a Mystery Visitor Mechanism that adopts a patient perspective to delve into the actual service programs provided to patients and collect insights into internal operations. This will ensure effective assessment and significantly reduce irregular behaviors during service, enhancing the fundraising consulting service level. We're continuously improving our service and risk control stability. We actively collaborate with various stakeholders, including judicial departments, hospitals, and industry leaders, to crack down on dishonest fundraising activities, ensuring that every single donation is used properly. This year at the Integrity Beijing 315 Gala, Waterdrop was honored as a consumer integrated integrity commitment enterprise for 2023. As a medical crowdfunding platform, Waterdrop has always maintained an open and transparent attitude, providing assistance to extremely needy patients and delivering more value to society while actively fulfilling our social responsibility. This quarter, Waterdrop also received a 2022 Public Welfare Enterprise Award and was included in the list of 2022 most socially responsible enterprises. The company will continue to explore participation in critical illness assistance and the construction of a multi-level medical security system. In terms of our digital clinical trial solution business, as the impact of the pandemic stabilizes in the first quarter, we see a growth trend. In the first quarter, the E-find patient platform successfully enrolled over 700 patients as the impact of the pandemic and holiday gradually decreased. The platform saw a significant deceleration in clinical trial enrollment, with over 350 patients enrolled in March, greatly speeding up the progress of our partners' clinical trials. As our industry matures, our E-find patient platform has attracted leading domestic and international pharmaceuticals to example partnerships and continue global collaborations. In the first quarter, we collaborated with over 120 pharmaceutical companies and CROs based on our outstanding track record in Q4 2022, and we will keep expanding the scope of collaboration. The platform has established partnerships with several top international pharmaceutical companies and will officially kick off a number of projects in the second quarter. In the first quarter, the E-find platform launched over 70 new projects, continuing to lead the recruitment advantage in the field of oncology. Meanwhile, the platform consciously expanded into more diseases by leveraging our brand influence, patient population, and extensive patient community. We expanded recruitment for chronic diseases and multiple product categories. In the first quarter, we had psoriasis, atopic dermatitis, asthma, and other chronic diseases. In the field of psoriasis, over 100 patients were enrolled in March, showcasing our efficiency and quality in a leading industry position. In the first quarter, the company continued to innovate in our R&D initiatives. Our technologies among the patient care domain are continuously activated and can support the first-level structuring of titrated and recorded summaries, discharge documents, and medical records, among others. Based on that, we have achieved substantial advancements in drug information for liver cancer patients. Utilizing relevant technology, the first data collection of material orders increased by 2%. We aim continuously to improve business efficiency. Thank you. I will now hand over to Yang Guang to discuss our first quarter financial performance.

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

Thank you, Zetao. Hello, everyone, I will now walk you through our financial highlights for the first quarter. Before I go into the details on the financial performance, 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 basis. In the first quarter, the company adhered to a high-quality development model. The company's revenue was RMB 606 million, slightly lower compared to RMB 649 million in the same period of 2022. Among them, insurance-related income was RMB 536 million, representing a year-on-year decrease of 14.6%. Corresponding service fees were RMB 42 million compared to nil in the same period last year. The digital clinical trial solution income was RMB 22.8 million, achieving a significant year-on-year growth of 167%. The company's overall operating cost and expense has increased by 12% year-over-year and decreased by 1.8% quarter-over-quarter. Operating costs increased by 60% year-over-year to RMB 248 million for the first quarter of 2023, compared with RMB 155 million for the first quarter of 2022, which was primarily driven by two effects: firstly, there was a RMB 29.1 million increase in professional and outsourcing customer service fees. Secondly, an increase of RMB 61.5 million was mainly due to recording the core funding consulting team costs as operating costs rather than sales and marketing expenses since we started generating crowdfunding service fees in April 2022. On a quarter-over-quarter basis, operating costs have decreased by 11%, primarily due to a decrease of RMB 25.9 million in professional and outsourcing customer service costs. Sales and marketing expenses decreased by 15.1% year-over-year to RMB 173 million for the first quarter of 2023, compared with RMB 204 million for the same quarter of 2022. This decrease was mainly due to corresponding direct costs being recorded from sales and marketing expenses being shifted to operating costs, as mentioned earlier. On a quarter-over-quarter basis, there has been a RMB 29.4 million increase in sales and marketing expenses as third-party advertising expenses for traffic channels increased in the quarter. General and administrative expenses decreased by 6.1% year-over-year to RMB 95.8 million, primarily due to a decrease of RMB 16.3 million in the allowance for doubtful accounts. On a quarter-over-quarter basis, general administrative expenses decreased by 19.2% in the first quarter of 2023, mainly due to a RMB 19.7 million decrease in the allowance for doubtful accounts. Research and development expenses increased by 11.2% to RMB 78.7 million year-over-year and increased by 9.8% on a quarter-over-quarter basis. The year-over-year and quarter-over-quarter increase are both mainly due to increases in R&D costs related to human resources and share-based compensation expenses. Adjusted net profit attributed to Waterdrop for the first quarter of 2023 was RMB 96.4 million and the GAAP net profit was RMB 49.7 million, indicating that we have generated GAAP profits over the past five quarters. As of the end of March 2023, the company has combined cash and cash equivalents and short-term investments of RMB 3.6 billion, indicating sufficient cash reserves. Overall, the business performance in the first quarter was stable. Looking ahead, we will continue to focus on user value and sustainable high-quality development. And ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for joining. Have a great day.

Operator, Operator

The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect.