Earnings Call Transcript - WDH Q2 2023

Operator, Operator

Good morning everyone. This is an unidentified representative from Waterdrop Investor Relationships. It's my pleasure to welcome everyone to Waterdrop's Second Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode in our English line. 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 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 statements, except as required by applicable law. Also, this 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. 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 second quarter 2023 earnings conference call. With the second quarter, in the insurance and pharmaceutical industry, the gradual enforcement of regulation, transparency, and acceleration have significantly improved, effectively enhancing user experience and satisfaction. This has also led compliance user insurance companies in breaking new growth opportunities. In this setting, the Company's proactively consensus regulatory trends respond actively to market demand, continually innovates products, and optimizes service, solidifying a leading edge in these sectors. Regardless of the challenging external environment, the management firmly believes that adhering to long-term value and maintaining a user-centric approach will secure greater market space. In the second quarter of 2023, the Company continued to focus on creating value for our users' capability and healthy development. The financial performance remains robust with our revenue reaching RMB679 million, carrying over an upward trend for the last five quarters. The net profit reached RMB21.7 million, demonstrating the sustainable and high-quality development of the Company's operations. With the same cost of net profit, the Company maintains ample cash reserves. As of the end of June, the Company had a total of RMB3.4 billion in cash, cash equivalents, and short-term investments. The abundant cash reserves helped the Company to face an uncertain environment with more confidence and support long-term trend and layout for future growth. All of our business models achieved strong performance in the future, consolidating our leading position and influence in the industry. First of all, we focus on our insurance marketplace and enhancing business viability. While exploring diversified customer acquisition channels, we also emphasize product innovation. Thanks to the efforts through what we call both SIP and revenue made sequential growth, it continued to contribute stable net profit to the Company. In terms of digital clinical trial solution business, due to our excellent performance, the E-find platform gained recognition from both domestic and international partners. We continue to expand the lead time and accelerate drug development for pharmaceuticals and have made significant progress in CRO in Q2. Digital clinical trial solution income was RMB29.4 million, achieving a significant year-on-year growth of 167%. Additionally, by iterating algorithms capabilities and risk management mechanisms, our Waterdrop Medical Crowdfunding platform firmly adheres to parent operations and leads us to compassion. Meanwhile, we enhance product quality that propels our service-oriented business model and embodies the principle of users first service mode. Along with business development, the Company continued to invest in research and development. In Q2, we continued to upgrade technologies like intelligent chatbots, deploying AI in various sectors including operations, and sales improving. We strongly accelerated operational efficiency, and the Company persists in leveraging technology to empower the industry in the complex and ever-changing macro environment. The Company engaged in corporate social responsibility initiatives. As of June 30, 2023, the Waterdrop Insurance platform had collaborated with about 110 public charitable organizations to carry out projects in areas such as education support. The program has raised about RMB1.3 billion and received contributions from more than 65 million donors. We also continue to decline ESG initiatives and strive to achieve mutual sustainable development between the Company and the society. We benchmark domestic and international ESG standards to establish a comprehensive framework and publish the 2022 ESG report. The report summarizes our company's management and performance in areas like governance participation, in a multilevel medical support system, technology innovation, green and low-carbon initiatives, and public welfare. We demonstrate the Company's commitment to high-quality and sustainable development. In terms of share repurchase, as of the end of August 2023, the Company has cumulatively repurchased 37.5 million ADS shares in the open market with cash for a total consideration of approximately $86.1 million. We also want to announce the expansion of the repurchase plan, which has received approval from all our directors. Within the next 12 months, the Company will repurchase shares in the open market for an amount not exceeding $50 million. This decision is based on the Company's strong confidence in our own value and long-term sustainable development. Meanwhile, this share repurchase will be used for the Employee Stock Option Plan, which will further motivate our employees. That is a brief review of our business performance in Q2, and although we are facing the challenging macro environment, we remain fully confident in our healthcare industry. Moving forward to the remaining half of this year, our strategies include business driven by long-term and digital transformation. Insurance systems will continue to be prioritized, striving to achieve long-term healthy and stable development. Meanwhile, we will continue to enhance key initiatives that solidify our business foundation and provide users with professional software services. The crowdfunding business will also innovate in the first quarter and refine the service model, guiding the industry towards high-quality development. We will adhere to transparent operations and implement risk management while actively fulfilling our corporate social responsibilities. Furthermore, by leveraging big data, the pharmaceutical sector will work to increase global industry penetration and create a new long-term growth engine. The Company will utilize its significant cash reserves to seize operational and investment opportunities in the insurance and healthcare sectors. Additionally, we will accelerate technology empowerment and strengthen our AI capabilities to build core technological competitiveness, supporting the implementation of long-term strategies across industries. The Company aims to promote organic growth and enhance user value, continuously improving the quality and service within the insurance and healthcare industry. Now, let me provide an update on our insurance business. In the second quarter, to improve service experience, the Company committed to quality development and explored new service models. During Q2, we reported RMB219.7 million in insurance-related revenue, achieving a 30% sequential growth. Insurance-related revenue reached RMB597 million, reflecting an 11% quarter-over-quarter increase. Short-term insurance generated a First Year Premium (FYP) of RMB1.6 billion, marking a 30% sequential growth. On one hand, the Company further developed our content base and activation capability, resulting in an increase in client innovation and high-quality content spread across medical platforms leading to growth in end-users. On the other hand, we continued to accelerate our existing client base by leveraging AI capabilities, improving the short-term insurance renewal rate to over 90%. Long-term insurance achieved a First Year Premium (FYP) of RMB590 million, representing a 29% sequential growth, with long-term insurance operating income increasing by 38% sequentially. As our long-term insurance products expand, the proportion of life insurance premiums within this segment has risen to 57%. This quarter, marketing efforts for long-term insurance products utilized improvements in our service model, focusing on user education, which led to 33% of FYP coming from private domain operations. We are also witnessing improvements in retention rates for marketed products. In Q2, Waterdrop continued to explore new growth channels to ensure sustainable business growth. Our online brokerage channel saw a 113% sequential growth in FYP, following a decline in interest rates. We developed new insurance products targeted at younger users in first and second-tier cities. Consequently, the number of users for segment insurance grew by 206% due to high-quality content and refined processes. Moreover, our team improved the service process, managing first-time responses within 20 minutes, leading to a Q2 increase of 49% in productivity per lead and 30% in productivity capital. Regarding offline agents, as the market rebounds and the team matures, we achieved an impressive 206% year-on-year growth in FYP. We continue to enhance product offerings and operational capability, upgrading our PD system to optimize the experience for agents and clients. We elevated recruiting standards, refined talent acquisition, and explored agent IP. The average productivity per active agent increased by 201% year-on-year, while the average number of long-term insurance policies per agent rose by 48% year-on-year. During the second quarter, the insurance marketplace enriched product offerings, targeting growth through innovations in long-term medical treatment and lifetime health insurance, allowing users to access these services at affordable prices and transition easily to a long-term medical insurance policy, ensuring user coverage. Targeting the elderly, we introduced products that cover many common serious illnesses, including malignant tumors, which was recognized in the annual product innovation list by the 2023 China Insurance Industry Rankings. For healthy individuals, we continued to improve our Blue Ocean series, the first domestic health insurance leading healthcare declaration, achieving over RMB100 million in FYP in Q2. Additionally, we actively explored multichannel sales of insurance covering medication, operations, and emergencies, resulting in a sequential increase in FYP. For users with pre-existing conditions, we innovated products like the Waterdrop Carefree series, which has gained significant recognition for covering specific conditions. In surgical accident insurance, we provide solutions across 5,000 departments in 32 hospitals, aiding patients in post-hospital recovery. As a technology company, we are advancing our insurance technology. In Q2, we increased AI investments, expanded our team, and upgraded our AI chatbot service, which now communicates with users for over 20 minutes and is integrated into operations, sales, and claims. This integration has effectively enhanced service productivity and reduced costs. In terms of technology export, we continue to excel in our service capabilities and the usability of both wealth management and wealth tool models, while collaborating with three new partners to accelerate the industry's transformation towards digital intelligence. This concludes my update on the insurance business. Let me hand over to Zetao for an update on our Medical Crowdfunding and Digital Clinical Trial Solution Business.

Zetao Zhu, GM of Crowdfunding and Pharmatech Business

Thank you, Shen Peng. As of June 30, 2023, a total of 439 million people donated more than RMB60 billion to over 2.95 million patients through the Waterdrop Medical Crowdfunding platform. Both in-house users and crowdfunding continue to grow. This quarter, the operational transparency committee focused on the authenticity of financial summaries in crowdfunding cases. We continuously enhance governance and transformation of consulting services. In terms of asset authenticity, to reduce the risk of an inaccurate financial situation of crowdfunding patient families, the committee established a special live to achieve better control, which introduced the concept of core family assets and the net worth of asset and income in describing the patient's family financial situation. We upgraded our estimation process for reasonable target crowdfunding amounts, not only adding application information and more convincing content but incorporating AI capabilities to further improve controllability. Moreover, this approach allows for better communication between crowdfunding services and donors, showing the platform's commitment to authenticity. The committee also initiated a specialized governance targeting crowdfunding consulting behavior and kept strengthening compliance conduct by implementing nationwide self-inspections to mitigate higher risk scenarios. Meanwhile, we introduced consulting service principles focusing on the strength and proactive service awareness of consultants to help them better address patient needs, establishing corresponding service standards throughout the entire crowdfunding-related services. Additionally, we introduced a new consulting service evaluation system based on user satisfaction. In terms of transforming offline commitment service, we successfully piloted and expanded service-oriented moderate solutions, resulting in a significant increase in Net Promoter Scores within hospitals. We established partnerships with several hospitals in our service-oriented consortium to assist those within our region. On one hand, our consulting staff utilize administrative technology to provide timely medical care to patients. On the other hand, the role of consultants has expanded to include offering general advice during hospitalization, guiding patients in interpreting medical insurance policies, and facilitating charitable care initiatives. In terms of digital clinical trial solutions, the business continued to show strong growth leveraging its outstanding performance capabilities. The E-find platform successfully enrolled over 900 patients in Q2, marking a sequential growth of 33%. Additionally, we collaborated with 132 pharmaceuticals and CROs globally, which is an increase of 11 partners sequentially. These accomplishments reflect core recognition by our clients, as the platform's interim goal continues to strengthen collaboration with domestic pharmaceutical companies while thickening partnerships with leading multinationals worldwide. In Q2, the platform launched approximately 80 new products, and the proportion of projects with enhanced capabilities increased. The platform also achieved cooperation intentions with two top 20 multinational pharmaceuticals, officially kicking off the supply process and anticipating launching products in Q4. Along with recurring diseases, the platform is expanding research into chronic diseases, beyond those like psoriasis and asthma. We ensure product quality while meeting enhancement for fulfillment capabilities. In Q2, the platform's CRO business made significant progress by signing our new CRO project, which provides comprehensive clinical trial services including data insight, medical sales, data management, statistical analysis, and project management. This achievement underscores the platform's visibility for end-to-end operations in clinical trials. We are also exploring patient operations, leveraging our online operations partnership to optimize patient filtering, patient education, and medication management. Regarding R&D in the medical field, we continue to enhance our medical data center, which is now capable of completing first-level structuring for 10 different types of medical materials, adding approximately 600 new medical sales categories and extracting critical information for conditions like liver cancer. The system can automatically extract relevant information, which puts a strong data foundation in place for better customer service. Thank you for listening. I will now hand over to Yang Guang to discuss our second 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 second quarter. Before going into detail, please be reminded that all numbers given here will be in RMB. Please refer to our earnings release for additional information on our financial performance on both a year-over-year and quarter-over-quarter basis. In the second quarter, all business lines showed steady responses demonstrating strong business resilience. The Company's revenue was RMB679 million, slightly lower compared to RMB711 million in Q2 of 2022, an increase of 12% compared to RMB606 million for Q1 of 2023. Among them, insurance-related income was RMB597 million, representing a sequential increase of 11.4%. Crowdfunding service fees were $44.7 million, representing a sequential increase of 6.4%. Digital clinical trial solution income was RMB29.4 million, which has increased by 28.9% sequentially and achieved a significant year-on-year growth of 167%. The Company's overall premium cost and expenses have increased by 32.1% year-on-year and decreased by 20.9% quarter-over-quarter. Operating costs increased by 36.2% year-on-year, reaching RMB333 million for Q2 of 2023, compared to RMB245 million for Q2 of 2022, which were primarily driven by two operating expenditures. RMB74.2 million resulted from increased referral fees and RMB8.9 million from patient recruitment consulting fees. Quarter-over-quarter, operating costs increased by 34.3% in this quarter, primarily due to RMB60.9 million in referral and service fees. Sales and Marketing (S&M) expenses increased by 41.6% to RMB205 million in this quarter compared to RMB144 million over Q2 of 2022 and increased by 18% compared with RMB173 million for Q1 of 2023. Both year-over-year and quarter-over-quarter increases were primarily due to the increase in third-party traffic channels. General and Administrative (G&A) expenses were RMB96 million in this quarter, which remains stable on a quarter-over-quarter basis. Research and Development (R&D) expenses increased by 23.1% to RMB86.7 million year-over-year and by 10.2% on a quarter-over-quarter basis. Both the quarter-over-quarter and year-over-year increase are mainly due to rising R&D human resources. In this quarter, the Company introduced segment reporting for the first time, categorizing our revenue and profitability into three segments: insurance, crowdfunding, and others. In summary, the insurance segment had an operating profit of RMB99.8 million, while the crowdfunding segment incurred an operating loss of RMB64.1 million, and the other segment incurred a RMB47.9 million operating loss. It's worth noting that the Company's overall profit is driven solely by the insurance segment. Adjusted profit attributed to Waterdrop in Q2 was RMB50.3 million, and GAAP net profit was RMB21.7 million, marking our six consecutive quarters of GAAP profit. As of the end of June 2023, the Company had combined cash, cash equivalents, and short-term investments of RMB3.4 billion, indicating sufficient cash reserves. Overall, business performance in Q2 was stable. Looking ahead, we will continue to focus on user value and sustainable high-quality development.

Operator, Operator

Thank you all for participating in Waterdrop's second quarter 2023 earnings conference call. This concludes our prepared remarks. We will now open the floor for questions.