Earnings Call Transcript - WDH Q4 2023

Tracy Lisang, Investor Relations Representative

Good morning, everyone. This is Tracy Lisang, Investor Relations, required to welcome everyone to Waterdrop's Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. As a reminder, today's conference call is being recorded. Please note the discussion today will contain forward-looking statements within the Safe Harbor provisions of the U.S. Private Securities and the Litigation Reform Act of 1985. Forward-looking statements are subject to risks and uncertainties and the comps actual results differ materially from our current expectations. 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, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a compilation between non-GAAP and GAAP. Joining us today on the call are Peng Shen, our Founder, Chairman and CEO; Mr. Yang Bang, Director, SVP and GM of the International business; and we will be happy to take some of the questions in Mandarin line at the end of the conference call.

Peng Shen, CEO

Hello, everyone. This is Shen Peng. Let's discuss our industry's development first. Looking back at 2023, thanks to various economic stimulus measures, the Chinese economy has displayed a gradually stabilizing and recovering trend. Despite some setbacks, the regulation of the personal insurance industry remains careful, evolving towards high-quality development. We see both challenges and opportunities, and we firmly believe that the clear guidance and gradual implementation of new regulatory policies will help achieve stability and sustainability in the industry, which is expected to improve further in the future. Market participants with strong brands and technological advantages are more likely to emerge, and we will focus on building new quality productivity through improved technologies and innovative business models to lead our industry's transformation and upgrade. We are confident about this. In terms of financial performance, in the fourth quarter of 2023, the company continued to embody its entrepreneurial spirit and pursue healthy business development, which was reflected in stable and resilient financial results. Total revenue reached approximately 659 million. Since the first quarter of 2022, we have consistently recorded stable profitability each quarter. In the fourth quarter, frontline performance improved further, with GAAP net profit attributable to the company reaching about 59.1 million, indicating a 61% increase quarter-on-quarter. For the full year 2023, GAAP net profit attributed to the company is around 167 million. Meanwhile, we have seen steady cash inflow from operations, increasing our cash balance. By the end of 2023, our cash, cash equivalents, and short-term investments amounted to about 3.39 billion, an 8% rise from the last quarter. Our cash reserves strengthen our foundation for executing steady business development plans, positioning us well for long-term growth initiatives and enabling us to adapt to industry changes with confidence and technological competitiveness. From a business perspective, in the fourth quarter, all business segments maintained stable and healthy development, reinforcing our leading position in the industry. In the life insurance marketplace, despite challenging industry conditions, we actively created new products and models, leveraging our insights to continue generating steady growth. We remain dedicated to our customer-first service approach, especially in developing a multi-level medical support system, consistently improving transparency and operational efficiency within the segment, which was reduced compared to the last quarter. We are enhancing our service capabilities through business upgrades. In the fourth quarter, the number of empowering clients significantly increased, showing positive growth in our partnerships with domestic and foreign partners. For the full year, this segment saw nearly 70% year-over-year revenue growth. As a technology-driven company, we maintained significant investment in R&D, applying some of those resources to AI large language models and patents. In the fourth quarter, our stock development LLM achieved completion of internet tests and embraced external applications to enhance efficiency across our insurance services. Now, I will briefly cover our charity and ESG initiatives. We actively integrate ESG principles into various aspects of our operations, with environmental protection and community talent investments deeply interconnected with our corporate values. The latest ESG ratings from leading institutions in China show that our ESG ratings have recently been upgraded to A, the highest score among companies in the insurance sector. In terms of our charitable performance, we remain committed to our corporate social responsibility. We established a medical support information system, which is foundational for security assessments, medical assistance, and financial risk charity. Since its launch in August 2023, it has aided the government in creating a provincial-level medical support platform, serving nearly 3 million individuals by year-end. These initiatives have received various honors. In December 2023, in response to an earthquake, our emergency team initiated a fundraising project to assist affected individuals. I would also like to share our recent actions in the capital market. Regarding the share buyback program, as of the end of February 2024, the company has repurchased about 39.7 million shares in the open market for a total of nearly 88.8 million, affirming our confidence in our business value and its long-term prospects. Additionally, repurchased shares will be utilized for employee stock ownership plans to motivate our employees. Furthermore, Waterdrop remains committed to our shareholders; our Board of Directors has approved a special cash dividend of approximately $15 million, resulting in $3 million or $0.04 per ADS. Based on the company's strong financial performance and commitment to shareholder value, we are pleased to announce our first dividend program, and we aim to continue returning value to our shareholders in the future. This concludes our recap of the developments in the fourth quarter and our business outlook in the industry. Looking ahead to 2024, our strategies for insurance metrics will adhere to core principles focused on providing backend services to emerging new leaders. Meanwhile, we will develop more customized and useful insurance products through technological innovation to meet various user needs. In medical performance, we will continue to leverage our technological capabilities for sustainable development while fulfilling CSR and ESG objectives. For our eFan platform, we will utilize our capabilities to our advantage, adopt more innovative models, and create a new growth engine for long-term success. With ample cash reserves, the company will continue to seek collaboration and investment opportunities in the insurance and healthcare sectors. Regarding technology, we will accelerate our development by enhancing our AI capabilities and core technological foundations, which are essential for long-term growth based on nearly eight years of business experience. Our self-developed LLM has significantly boosted internal efficiency. Now I will hand it over.

Unidentified Company Representative, Business Update Representative

In the fourth quarter, the personal insurance financing industry experienced a decline in growth despite efforts to introduce new offerings and optimize operations. We explored new product options and platforms, expanding customer acquisition channels to enhance high-quality business segments. The first-year premium reached RMB1.53 billion, with insurance-related income of RMB588 million and operating profit of RMB128 million. For the full year of 2023, the first-year premium totaled approximately RMB7.11 billion, with insurance-related income around RMB2.34 billion and operating profit of RMB528 million. The first-year premium for short-term insurance products exceeded RMB990 million. This quarter, we improved operational management for users, enhancing policy services and user engagement, leading to increased customer certification and satisfaction. The number of users grew, and the number of policies per user increased by two-to-one. Renewals for short-term insurance remained steady at RMB0.25. We enhanced client production, allowing for quality product choices on leading channels, resulting in a 68.6% quarter-over-quarter increase in premiums, leading to a 34.5% sequential growth. As we bolstered our offline business, long-term insurance policies reached RMB530 million, marking a 22.9% year-over-year increase, with life insurance premiums soaring by 115.2% year-over-year. We improved the quality of long-term insurance users to facilitate policy transitions with insurance companies for more capitalized offerings. By showcasing the renewal of high-interest products from the third quarter, we established a solid position in the industry. In online distribution, we focused on integrating our product portfolio for enhanced user experiences and partnered with high-quality stock media channels to develop a strong user base. Our offline growth also advanced with the launch of the World One program this quarter, aiming to better serve high net worth customers through industry collaborations for a one-stop platform compared to basic insurance offerings, while empowering high-quality agents. Active agents increased by 108% year-over-year, and products alongside long-term insurance rose by 8% year-over-year. In the fourth quarter, one of our insurance packages significantly contributed to our results thanks to cooperation among stakeholders in R&D, marketing, and product offerings, leading to first-year premiums of RMB102 million. The policy quality remained at an industry-leading level, with a renewal rate above 90%. We continued to strengthen innovative capabilities in health and savings insurance, launching diverse products to our user base. Our health insurance now covers groups with chronic and critical diseases, and users with pre-existing conditions can purchase insurance online reliably. In addition to regular health plans, we introduced the first online long-term critical illness insurance that accommodates those with pre-existing conditions. We also launched a maternal and infant insurance product that covers the entire pregnancy period and a flexible monthly life insurance product to better serve various market needs. Regarding our AI development, we focus on enhancing user experience across growth areas such as conversion, claims processing, and customer service, as well as improving agent interactions. Two major applications, AI insurance conversion and a user-aid system, operate on an EBITDA threshold model. The AI insurance conversion acts as a smart agent using modern technology for real-time communication with customers, recognizing insurance policies and tailored product affinities. It aims to enhance interaction by refining efficiency in customer engagements. Thank you. As of Q4 2023, we have accumulated a total of RMB450 billion, donating more than RMB52.6 billion to over 3.1 million patients; including medical support. In Q4, our platform established valuable client relationships that provide support for hospitalizing patients. In the first quarter, platform service improvements have been made to ensure better communication with patients. The system allows operators to track any issues with patients and supervise the entire process. By continuously comparing or optimizing the process, we aim to make the critical units of patient management more accurate and efficient. We have also actively communicated in the establishment of our medical sales force unit, responding to changes in charitable law in China. In Q4, the amended version of relevant regulations has passed and been incorporated into our operations. Furthermore, on December 21, our medical support initiative was awarded a recognition event hosted by prominent health institutions. In the fourth quarter, our clinical trial involvement maintained steady and healthy investments. We secured deals worth about RMB20.8 million. For full-year revenue, it increased by 6.9% year-over-year. In Q4, we collaborated with similar companies and CROs, making great progress partnering with reputable entities. We initiated projects that are expected to officially launch in 2024. Additionally, we have operational relationships with leading global CROs and have begun patient recruitment this quarter. In Q4, the company signed 82 new projects. With rapid developments in various R&D drives, our platform continues to enhance quality insurance capabilities. Efficient operation capabilities, driven by AI, have enrolled a record number of patients and projects. Our project categories include dermatology, respiratory, cardiovascular, and other diverse diseases. In terms of CROs, we are fostering a productive relationship, providing enhancements in medical affairs, product management, innovation, patient recruitment, and statistical analysis. Regarding patient services, our capabilities have grown alongside leading experts globally, implementing technology-driven practices that improve patient service experiences and efficiencies, earning recognition from customers. We also engaged contracts with leading domestic entities for medical patient operations, data insights, and continuing to expand our service scope. We strive for technological empowerment, employing AI-driven technology effectively to enhance service quality compared to traditional methods. These improvements significantly optimize our process outputs. Thank you, everyone. And we will now move to our financial highlights for the fourth quarter. Before I go into details, please be reminded that all numbers quoted here will be in RMB. Please refer to our earnings release for the detailed information on our financial performance on both year-over-year and quarter-over-quarter basis. For the fourth quarter, our ongoing commitment to maintaining steady and healthy development saw non-operating revenues decrease by 3% year-over-year to about RMB659 million. Full year insurance revenue reached about RMB2.63 billion. Of that, insurance-related income amounted to about RMB2.34 billion, reflecting a nominal decrease of 8.5% year-over-year. Compounding service fees amounted to RMB162 million, with an increase of 4.4% year-over-year. Key points include high operating income amounting to RMB100 million, representing an increase of nearly 70% year-over-year. Our operating costs and expenses, on a year-over-year basis against the last quarter, we consolidated financial results. For the full year, the operating costs and expenses increased by 13.5% year-over-year to RMB2.64 billion. For Q4, operating cost and incentives increased by 4.3% year-over-year to RMB633 million. On a quarter-on-quarter basis, operating costs increased by 8.1% in response to external changes. For Q4, operating costs were about RMB202 million, which increased by 8.5% year-over-year but decreased by 3.2% quarter-on-quarter. This sequential decrease is primarily due to a drop of RMB5.8 million in service fees. The economic cost increased by 26.9% year-over-year to RMB175 million, largely driven by the consolidation of expenses related to service providers, mainly offset by a decrease in personnel costs and share-based compensation. G&A expenses were RMB96 million, a decrease of 19.1% and 16.3% year-over-year and quarter-over-quarter respectively, mainly due to reductions in personnel costs and professional service fees. R&D expenses were RMB59.8 million, experiencing a decrease of 13.6% year-over-year and 19.1% quarter-over-quarter. For Q4, net profit attributed to the company was RMB59.1 million, with GAAP net profit for the company’s shareholders at RMB74.7 million. Since Q1 2022, the company has achieved GAAP net profit for eight consecutive quarters. Year-end cash, cash equivalents, and short-term investments amounted to RMB3.39 billion, reflecting an 8% increase from last quarter. These healthy cash reserves position us well to focus on our long-term development priorities. In conclusion, to add value for our shareholders and investor confidence, our Board of Directors has approved a special cash dividend of approximately RMB15 million, with RMB0.4 for ordinary shares and RMB0.4 for ADS holders. Shareholders of ordinary shares and ADS of the recorded date of April 19, 2024, will be entitled to receive it. In summary, we aim to deliver profitability and healthy growth in 2024.