Yiren Digital Ltd. Q3 FY2024 Earnings Call

Good day and welcome to the Yiren Digital Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Keyao He, IR Officer. Please go ahead.

Thank you, operator. Good morning and good evening, everyone. Today's call features a presentation by the Founder, Chairman and CEO of CreditEase, our CEO, Mr. Ning Tang; and our CFO, Mr. Yuning Feng. There will be a Q&A section after the prepared remarks. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provision of the US Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties, and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding future risks, uncertainties, or factors is included in our filings with the US Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements as required under the relevant laws. During the call, we will be referring to certain non-GAAP financial measures and supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with US GAAP. For information about these non-GAAP financial measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it to Ning for opening remarks.

Thank you all for joining our earnings conference call today. I'm pleased to report a stable and healthy quarter with concrete business development and strategic exploration, driven by our quality over quantity strategy. This quarter's results underscored our consistent focus on sustainable, high-quality growth. Before I go into operational details, I'd like to share some highlights from this quarter. First, our Financial Services business made notable improvements in asset quality, thanks to our continued focus on strong risk management and borrower optimization. Second, we've been proactively exploring new online business models for our insurance division and have seen visible progress, driving an increase in sales of retirement-themed insurance products. As a tech-powered platform, Yiren Digital prioritizes the use of technology and digital capabilities to enhance our business model. Our growing online business model is expanding from financial services to the insurance brokerage space. Third, our ongoing investment in AI is already bearing fruit with proprietary AI applications now largely integrated into our daily operations, driving efficiency and improving customer experience. Altogether, these efforts are laying a solid foundation for the next phase of higher quality growth, one that will continue to drive value for our shareholders in the years to come. Now, let me go through our key business highlights. First, regarding our Financial Services business, the third quarter of 2024 saw continued growth with total loan volume reaching RMB13.4 billion, a 36% increase year-over-year. The number of borrowers stayed relatively stable quarter-over-quarter at 115 million, a 24% growth compared to the same period last year. Meanwhile, our lending platform Yixianghua remains highly popular with monthly active users staying steady at around 4.5 million, a 52% year-over-year increase. Growth has been primarily driven by strong demand for our small revolving loan products and an increase in repeat borrowing from high-quality customers. As I mentioned earlier, we have enhanced the quality of our customer base by focusing on higher-quality customers with stronger repayment capabilities and better risk profiles. And now those new customers are contributing to a growing proportion of repeat loans, becoming an important growth driver. Over 60% of the loans facilitated during the quarter came from repeat borrowers, up five percentage points from the previous quarter. As our efforts to upgrade our customer segments yield success in phases, we are now focusing on increasing the repeat borrowing rate among existing customers while maintaining a balanced mix of new and returning customers. Furthermore, as a result of our customer quality upgrades and highly effective AI-driven risk management, we've seen significant improvements across various risk indicators, confirming the effectiveness of our approach. In the third quarter, our FPD 30-plus rate dropped by 32 basis points to a record low. As of September 30th, 2024, delinquency rates for the 1 to 30 day, 31 to 60 day, and the 60 to 90 day buckets fell by 10 basis points, 20 basis points, and 30 basis points quarter-over-quarter respectively. Additionally, M1 recovery rates rose by 1.82 percentage points, reaching an all-time high. The shift in our borrower structure establishes a solid foundation for our sustainable growth. On the funding side, we made essential progress in expanding our funding partnerships. By the end of the third quarter of 2024, we have added nearly 20 new funding partners for the year. Meanwhile, our funding cost saw another 64 basis points reduction quarter-over-quarter. Moving on to our international business. Our growth momentum remains strong. In the Philippines, both loan volumes and revenues posted double-digit increases quarter-over-quarter. We also began optimizing our customer base there while iterating our product offerings. And we expect these efforts to positively impact profitability in the fourth quarter of this year. On our AI strategy, we made substantial progress with six proprietary AI systems now supporting customer acquisition, customer service, asset management, and collections in our daily operations. I will now highlight several updates to demonstrate this progress. Firstly, for our domestic business operations, AI has significantly enhanced our collection and quality assurance processes. As of the end of the third quarter, 77% of day one overdue cases were covered by AI Robots, resulting in labor cost savings of nearly RMB2 million in Q3 alone. Meanwhile, to ensure the high professionalism of our services, we deployed 20 AI models for quality assurance in loan collections and eight AI models for quality assurance in customer service, with the collections models achieving over 96% accuracy. Additionally, we strengthened our AI talent pool by hiring over 50 professionals specializing in AI development, data science, and modeling, further enhancing our digital capabilities. Secondly, in our overseas operations, we fully developed and refined our AI-powered ID verification model in the Philippines, achieving an accuracy rate of nearly 95% in the third quarter with performance now stabilizing. Moving to our insurance brokerage business, the overall industry has faced profitability pressure due to regulatory changes including lower interest rates and the policy of unified commissions and fees in reporting and underwriting. Despite these challenges, our total premiums this quarter recovered to RMB1.35 billion, a 27% quarter-over-quarter increase. The rebound was partially driven by our online business initiatives. As I mentioned earlier, we've made progress in customer acquisition through social media, supported by AI-generated content. During the quarter, new policy premiums from social media channels contributed RMB7.5 million. This is a promising start. We also built a dedicated team to focus on private traffic operations, driving efficient customer acquisition and conversion. Additionally, we are working on creating more synergies between our lending platform and insurance services by offering customized insurance products to our borrowers, and we expect to see growth from these efforts in the fourth quarter. In the Consumption and Lifestyle Services segment, our total GMV was RMB508 million for the quarter, a 10% year-over-year decline. As our customer base evolves, we are refining our product range to better serve our evolving demographics. Looking ahead, we plan to introduce more high-quality, tailored products to meet their specific needs. In summary, our priority remains ensuring long-term sustainable growth. In times of external uncertainty and market fluctuations, it is critical to stay focused on maintaining the quality of our business. We will continue to expand our online operations and enhance synergies across our businesses while further investing in R&D and increasing AI penetration. Furthermore, regarding our AI development, I would like to reiterate that we have been executing our AI strategy through the AI Lab, which incubates, invests in, and provides value-added services to AI start-ups targeting enterprises, developers, and consumers. We have made several early-stage investments this year, and we are exploring business cooperation with them. Additionally, I'm pleased to share that the commercialization of our proprietary AI systems is already underway, and we expect to see corresponding revenue reflected in our P&L in the near future. Now I will pass it to Yuning, who will go through our financial performance.

Thank you, Ning. Hello, everyone. On this call, I will only focus on our key financial highlights. Please refer to our earnings release and IR deck for further details both available on our website. First of all, we are glad to have delivered a healthy quarter with stable financial performance. In the third quarter of this year, our total revenue reached RMB1.5 billion, up 13% year-over-year. In the Financial Service segment, total loan facilitation continued to grow steadily reaching RMB13.4 billion, up 36% year-over-year. This is primarily driven by strong demand for our small revolving loan products and the rise in repeat borrowing from our high-quality borrowers. Revenue from our Financial Service business increased 25% year-over-year to RMB836 million, maintaining a healthy and steady growth rate in line with our quality over quantity business guideline, given external fluctuations. In the Insurance sector, our gross written premiums were RMB1.4 billion, down 5% year-over-year, but up 27% quarter-over-quarter. The annual decrease was primarily due to a significant decline in our life insurance sales, resulting from regulatory changes and product adjustments. The quarterly rebound was driven by our online insurance sales. As our ongoing online initiatives continue to progress, we expect further recovery in our overall insurance volume in 2025. Earlier this year, the guaranteed return on life insurance product was further capped at 2.5% annually under the new regulation, following a rate reduction from 3.5% to 3% last August, which has further impacted the overall profitability of the life insurance sector in China. Moreover, the ongoing implications of the Unified Commission Fees in Reporting and Underwriting Regulation are adding pressure to commission rates industry-wide. Consequently, the third quarter this year revenue from the insurance segment was RMB85.5 million, down 68% year-over-year. In the Consumption and Lifestyle segment, the total GMV for this quarter stood at RMB508 million, a decrease of 10% year-over-year. The decline was due to already high product penetration among existing customers and our strategic reduction in product offerings as we moved upmarket with our customer base. As our customer demographic evolves, we are strategically phasing out older product offerings and developing new products tailored to their specific profiles and needs. On the expense side, sales and marketing spend increased 71% year-over-year to RMB336 million. This annual growth was mainly fueled by the swift expansion of our Financial Service segment and enhanced marketing efforts focused on attracting new and high-quality customers. Research and development expenses increased 287% year-over-year to RMB151 million due to our ongoing investment in AI enhancement, technology advancements, and hiring of AI talents. Origination, servicing, and other operating costs decreased 16% year-over-year to RMB206 million. This was mainly because of the decrease in the insurance business volume, which resulted in lower channel rebates and associated settlement costs. G&A expenses increased 50% year-over-year to RMB80 million. The annual growth was mainly due to the increase in incentive bonuses and employee benefits. The allowance for the contract asset and receivable was RMB95 million, up 31% year-over-year. The increase was mainly driven by growth in our loan volume facilitated. Provision for contingent liability this quarter increased to RMB272 million from RMB11 million in the same period of 2023. This is a result of continued growth in loan volumes and our new risk-taking model, which required substantial upfront provision according to current accounting standards. However, this provision will be periodically recognized in the P&L as guaranteed service fees over time. In other words, there is a time difference in revenue recognition under this product model. However, from a loan's lifetime perspective, profitability will show better performance compared to loans under a non-risk-taking model. In the third quarter, the revenue from guaranteed service reached RMB137 million, which is five times that in the same period last year. Now on the bottom line. Net income this quarter was RMB355 million, decreased 36% year-over-year. The decrease in net income is due to three reasons. Firstly, as noted earlier, overall profitability in the insurance business decreased. Secondly, marketing and R&D expenses rose as we continue to invest in attracting new high-quality borrowers from our Financial Service business and investing in developing our in-house AI capabilities. Thirdly, significant upfront provision has been set aside as we increased loan volume in our risk-taking models. Regarding cash flow, as our loan facilitation business continues to grow and our loan balance expands, our funding sources, which are banks, financial institutions, etc., and associated guaranteed companies request that we provide a strategic deposit, a common practice in the industry. This quarter, we made a one-time deposit payment based on our current loan balance, resulting in a notable decrease in our operating cash flow. We generated approximately RMB50 million net cash from our operations this quarter, but looking ahead, cash flow is expected to return to normal levels next quarter. On the balance sheet side, our cash and cash equivalents remained strong at RMB3.7 billion, though reflecting a notable decrease. This change is related to our long-term investment in business expansion and potential license acquisition, which are still in progress. We will disclose more details once the deals are secured. Now, regarding shareholder returns, firstly, for share buybacks. In the third quarter of this year, we allocated US$3 million to repurchase shares in the public market. As of September 30th, 2024, the company has purchased approximately 5 million ADS in the open market for a total of approximately US$16.5 million, excluding commissions under the 2022 share repurchase program. Additionally, we distributed a cash dividend in October under our semiannual dividend policy with total payout ratio of 40% of our earnings for the first half of 2024. Lastly, on our business outlook, based on our assessment of current business and marketing conditions, we expect our revenue for the fourth quarter of 2024 to stand between RMB1.3 billion to RMB1.5 billion, with a healthy net profit margin. This represents our current and preliminary assessment, which may be subject to change and uncertainties. This concludes our remarks.

Operator, we're open for the Q&A section.

Thank you.

Thank you. We will now begin the question-and-answer session. And our first question today comes from Kris Wu with Look Capital. Please go ahead.

Thank you, management, for your insights. Examining the financial results, we observed that your loan volume increased by 3.5% quarter-over-quarter, although it decreased from last quarter's 9%. Can you explain the reason for this slowdown? Additionally, as we look towards Q4, have you experienced any rise in credit demand and loan applications during October and November? Also, do you have any updates regarding your new customer acquisition strategy? Thank you.

Thank you. I'll take the first part and Yuning can add to it, please. I mean, we see that demand for credit remains high, but it's a very uncertain market condition, and we are focused on this quality over quantity strategy, which makes it essential to do great risk management. That's where you see our results are very encouraging. Going forward, we will maintain this strategy, but we are also working harder on bringing in more high-quality customers with a reasonable customer acquisition cost associated with it. So, Yuning, please add to it.

Thank you, Tang. We are expecting that in Q4, we are still carrying on our customer acquisition strategy. As we are a 100% online business model, in this year, we are cooperating with TikTok, Douyin, and WeChat to co-build an AI-driven real-time analysis model, which efficiently screens unqualified borrowers based on their credit score and identifies qualified borrowers. As this year comes to an end, we expect the cost of customer acquisition to still be a little bit high in this quarter due to strong competition from the market and the need to manage our risk level. So, we will see how Q3 ends. But to summarize, we are still keeping a steady strategy and trying to acquire new customers at a reasonable cost while expanding our repeat borrowing pool.

The idea is we keep our risk management robust and try our best to grow. We are confident that we will have relatively high growth in the quarters to come.

Thank you.

Hi, Kris. I hope that answers your question.

Sure, sure. It's encouraging to know.

Do you have any further questions?

Yeah, sure. Can you hear me? Yeah, let me follow up. It's encouraging to know that we are maintaining a healthy momentum and also caring for risk management at the same time. Perhaps the next interesting aspect to look at is AI. Since we are seeing that you are increasing your investment in AI and hiring quite a number of professionals, could you explain what makes you competitive in the AI space, especially given that we have so many AI-native companies in the market? And could you also tell us more about the AI systems that will be commercialized, as you mentioned in your remarks? Thank you.

Thank you for the question. We are not a large language model company; we are an application of AI company. So, we have specific use cases and data accumulated over the years. We are uniquely positioned to build credit-related and insurance-related models, giving us an edge as an AI application company. As I reported earlier, AI systems have been developed across our business from customer acquisition to risk assessment and customer service. Many of these modules, based on our preliminary market research, are well-received in the marketplace. We are working on monetizing these valuable assets. Yuning, can you add to it?

As we mentioned earlier in the call, we have developed six major AI systems that support our business operations. Some of them are quite mature for use in our day-to-day business, while others are in earlier development stages. We are evaluating which systems we can utilize for our business partners, as some can be used with peers, and some with financial institutions. We aim to make the systems useful in the market and develop business, especially with our peers and financial institutions. We expect to see some progress in the near future, possibly within six months to a year.

Let me add two more points, if I may. Firstly, finance-related exchanges and interactions need to be very precise. Therefore, we are prudent in developing and utilizing AI models. We recognize that generative AI has certain shortcomings, and we employ various strategies to mitigate those issues. However, some models are still in the lab phase and haven’t been fully utilized while many others are in the deployment stage and ready for external commercialization. Secondly, I'd like to point out that overseas markets can be promising places for AI deployment, presenting us opportunities to leapfrog as we experienced with advancements in China related to the Internet, mobile Internet, big data, and different phases of AI, particularly generative AI. We will progress carefully in terms of risk management and compliance as well.

We hope that answers your question, Kris, and thank you very much for your questions.

Thank you. This concludes our question-and-answer session. If you have any further questions, please contact the company's IR team for assistance. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.