Yiren Digital Ltd. Q2 FY2025 Earnings Call

Good day, ladies and gentlemen, and welcome to the Yiren Digital Second Quarter 2025 Earnings Conference Call. Please note that this event is being recorded. I will now turn the conference over to Keyao, IR Officer of YRD. Please go ahead, ma'am. Thank you, operator. Good morning and good evening, everyone. Today's call features the presentation by our Founder, Chairman and CEO of CreditEase, our CEO, Mr. Ning Tang; and our CFO, Mr. William Hui, who will join the Q&A session after the prepared remarks. Before beginning, we would like to remind you the discussions during this call contain forward-looking statements made under the safe harbor provision of U.S. Private Securities Litigation Reform Act of 1995. Such statements are affected by risks, uncertainties and factors that may cause actual results to differ materially from those contained in any such statements. For any information regarding future risks, uncertainties or factors, it is included in our filings for the U.S. Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements as required under relevant law. During the call, we will be referring to certain non-GAAP financial measures and supplemental measures to review and assess our operational performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financials mentioned prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP financing measures and reconciliation to GAAP measures, please refer to the earnings press release. I will now pass it to Ning for opening remarks.

Thank you all for joining our earnings conference call today. We are pleased to report another strong quarter driven by the continued success of our AI-powered strategy. Our advanced AI capabilities have delivered quantifiable results, more personalized customer engagement, enhanced risk management with predictable analytics and fraud detection, and improved service efficiency with compliant tailored solutions. This robust AI foundation enables us to innovate faster, exceed customer expectations and optimize operational performance. Our growth is further fueled by three strategic priorities: AI innovation, geographic expansion, and operational excellence. These initiatives are accelerating momentum across our core business while unlocking new opportunities through our proprietary AI platform by executing on this strategy. We are well-positioned to sustain long-term success. Here are some of our successes. Our AI sales agent executes over 1,700 personalized marketing tasks daily, which results in a higher customer response rate. The AI capital manager completes the capital deployment optimization process in 10 minutes versus 1 week by 6 employees in the past. The AI risk manager detects and blocks over 30,000 high-risk identity documents daily, resulting in the prevention of over RMB 180 million of loss from fraud annually. Most of our AI agents are monitored 24/7 by our supervisor AI model for quality checks and system integrity. Before we get into details of our operating results, I would like to address the recent loan facilitation regulation announcement. While the full impact on the industry take rates and business operations is yet to be seen until the regulations take effect on October 1, we have noticed that credit risk and capital costs have increased slightly. We believe the more regulated environment and the market conditions will trigger industry consolidation as smaller platforms exit the market and heighten the entry barrier. This will benefit established platforms like us. We are exploring different risk-sharing models with our partners to mitigate potentially higher risk. Now let me go through our business highlights for this quarter. First, on our financial services business, which accounts for over 90% of our revenue in the second quarter of 2025. Loan volume facilitated reached RMB 20.3 billion in Q2, representing a 34% increase quarter-over-quarter and a 57% growth year-over-year. The robust growth is mainly driven by increasing repeat borrowing, which rose to 77% in the second quarter of this year, up 3 percentage points from the prior quarter and 21 percentage points from the same period last year. As we reiterated previously, driving up the repeat borrowing rate and improving long-term trust and stickiness among our higher-quality borrowers are key focuses as we have notably upgraded our customer base by attracting those with stronger repayment capabilities and better credit performance. AI innovation and applications have played a pivotal role in driving our key objectives of boosting repeat borrowing rates and elevating service quality. In Q2 2025, we launched AI marketing system 2.0, extensively personalizing marketing content using generative AI. By the end of June, this system was conducting personalized marketing for over 600,000 users daily using AI-generated outreach strategies, 30 times the output of the 1.0 version in the prior quarter. This expansion facilitated more meaningful and efficient interactions with the average number of customer engagement runs rising from 7.1% in Q1 to 8.3% in Q2, further enhancing sales conversion rates. Additionally, intention recognition accuracy surpassed 80%, enabling more precise and effective engagement. On the quality assurance front, our AI-powered inspection system underwent critical algorithm upgrades, now covering the entire telemarketing segment. It performs real-time quality checks on over 2 million sales records daily, with accuracy jumping from 75% to 92%. This advancement has increased labor productivity by 50% while ensuring consistently high service standards. Now let's turn to the funding effect. In Q2 2025, our funding costs declined by 80 basis points year-over-year, though with a slight quarter-over-quarter increase. While new regulations in the loan facilitation business have introduced sector-wide fluctuations in funding supply, we anticipate manageable capital costs for the remainder of the year, supported by our strong liquidity management. Regarding our asset quality, our overall risk performance remained stable quarter-over-quarter. Though we did see some early delinquency increase in June, but the delinquency improved in July as we tightened our credit measures. As of June 30, our 1 to 30 days delinquency rate was 1.7%, up 10 basis points from the previous quarter. Meanwhile, our 31 to 60 days and 61 to 90 days delinquency rates actually came in at 1.1% and 1.0%, respectively; that's 10 and 20 basis points lower than where we were at the end of the first quarter. We have made substantial progress in strengthening our risk management framework recognizing industry-wide trends in the first half of this year. We overhauled our risk rating system, implementing a more granular 8-level classification model with stricter assessment criteria. Under this enhanced system, we selectively switched the system to decline lower-tier borrowing applications. This upgrade has effectively contained the delinquency increase in May and June and reversed the trend in July. We will continue to monitor the market conditions to maintain our loan portfolio performance. Speaking of our asset quality management, AI has also played a pivotal role, particularly in loan collections. In the second quarter of 2025, our AI collection robots handled 81% of D1 delinquency cases and started to cover the 31 to 60 cases in the domestic market. This automation realized average labor cost savings of RMB 2.7 million per month, a 42% increase from the first quarter's monthly average of RMB 1.9 million savings. Besides cost savings, our customer experience improved substantially, with borrower compliant rates decreasing by a further 80% quarter-over-quarter. Now let's look at our overseas business, which continues to demonstrate strong momentum. In the second quarter of 2025, our loan volume in the Philippines reached nearly RMB 200 million, representing a 54% growth compared to the first quarter of 2025. Our Indonesia pilot operation has begun and is expected to accelerate growth in Q4 this year and in 2026, following continued refinements to its data models. AI remains central to our strategy. Beyond our current applications, we are exploring the development of a fully autonomous AI agent platform that will integrate and automate the entire operational process spanning marketing, customer service, risk control, compliance, and quality assurance. Once implemented, this platform is expected to significantly enhance operational efficiency and reduce costs. We look forward to sharing more exciting developments in the near future. Moreover, our insurance brokerage business showed gradual recovery, with total premiums reaching approximately RMB 850 million in the quarter, a 6% increase quarter-over-quarter. Meanwhile, our digital insurance business has leveraged our existing customer acquisition channels to sell digital insurance products. It achieved 103% quarter-over-quarter growth in gross premiums reaching RMB 8.3 million in Q2 this year. This demonstrates the adaptability of our customer acquisition algorithm and infrastructure for monetization from a new category. Regarding our consumption and lifestyle service, as communicated in Q1, we decided to wind down this segment to concentrate on our core financial services to better reflect this strategic priority and ensure clearer financial reporting. We have refined our segment revenue categorization in this quarter's financials. William will provide further details on these adjustments during his remarks. Additionally, we are pleased to announce another round of cash dividend. Under our current semi-annual dividend policy, the company will distribute a cash dividend for the first half of 2025, amounting to USD 0.22 per American depositary share, which is expected to be paid on or about October 15, 2025, to holders of the company's ordinary shares and ADS of record as of the close of business on September 30, 2025, based on Hong Kong time and New York time, respectively. In closing, our financial services and customer acquisition platform have matured into a powerful monetization engine, as demonstrated by the strong performance of our digital insurance business, which we foresee sustaining its high growth for the next few quarters. By harnessing advanced AI, we have gained deeper insights into customer behavior, boosting conversion rates, expanding customer lifetime value, and unlocking monetization opportunities from previously untapped traffic. Despite the regulatory headwinds and changing market environment, our business has shown greater resilience. With that, I'll pass it to William, who will go through the financial performance for this quarter.

Thank you, Ning. Hello, everyone. I will be walking you through our financial performance for the second quarter of this year. Please refer to our earnings release and IR deck for further details, both available on our website. We are pleased to report a continued strong performance in the second quarter, with total revenue growing by 10.4% year-on-year, to RMB 1.65 billion. The growth was mainly driven by 75% revenue growth from the financial services segment, partially offset by a decline in revenues from the insurance brokerage and the consumption and lifestyle segment, which we decided to scale down. Our net income rebounded to RMB 358 million in the second quarter, which represents a 44.5% increase quarter-on-quarter and a 12.7% decrease year-on-year, but it reversed our 5-quarter declining trends in net income. In the financial services segment, total loan facilitation volume increased by 57% year-over-year to RMB 20.3 billion in the second quarter. The increase was driven by the strong demand for our small revolving loan products and the growth of repeat borrowers, which accounts for 77% by loan volume in the second quarter this year, up from 56% a year ago. The revenue from this segment increased by 75% year-on-year to RMB 1.5 billion in the second quarter. This segment contributes about 90% of the total net revenue of the company. Our loan guarantee services also saw significant growth. The revenue reached RMB 317 million in the second quarter, up nearly 3.6 times year-over-year as we complete almost one full guarantee cycle period and higher amounts of deferred revenue from past few quarters are being recognized as revenue. Because of that, the contribution margin for the entire financial service improved from 9.5% in the second quarter of 2024 to 30.2% in the second quarter of this year. In the insurance segment, our gross written premium declined by 20% year-over-year to RMB 850 million in the second quarter of 2025, primarily due to regulatory-driven commission rate compression that began in the second half of 2024 for our traditional brokerage line. However, the gross premium was up 6% compared to the first quarter of this year. The total revenue from the insurance line in Q2 was RMB 58 million. In September last year, we launched a digital insurance line using our existing acquisition channels from the financial services segment with virtually no additional customer acquisition costs. In the second quarter, the gross premium from the digital insurance line was RMB 8 million, and that represents 103% growth quarter-to-quarter. So we expect this growth momentum will continue in the next few quarters. One thing to highlight is that the margin for the digital insurance line is much higher than the traditional line because of a lower customer acquisition cost, and it has a much bigger opportunity to scale. So we expect the digital line will relieve some of the profit pressure from the decline of the traditional line. On the expense side, sales and marketing expenses in the second quarter increased by 21% year-over-year to RMB 345 million, driven by higher loan facilitation volume in the second quarter and the investment in acquiring high-quality borrowers. Research and development expenses grew by 93% year-over-year to RMB 108 million. So that reflects our increased focus on AI and engineering talent to drive innovation. Origination, servicing and other operating costs decreased by 35% year-over-year to RMB 161 million because of lower commission costs from the insurance brokerage business and ongoing operational efficiencies. General and administrative expenses for the quarter increased by 15% year-over-year to RMB 79 million, primarily due to an increase in personnel-related costs to support the growth of the overseas business and improved compliance practice. The allowance for contract assets and receivables and others for the quarter increased by 74% year-over-year to RMB 215 million, driven by higher facilitation loan volume from our overseas business and the loans funded by our own balance sheet. Provisions for contingent liabilities this year increased by 38% year-over-year to RMB 386 million because of the higher growth of our capital-intensive guarantee business. The net income for the second quarter was RMB 358 million or RMB 4.11 per share or USD 0.57 per ADR share. That represents a 44% growth from the first quarter of this year and a 12% decrease from the same period last year. The net margin improved from 16% in the first quarter of this year to 22% for this quarter. The net cash flow from our operations in the second quarter was RMB 411 million, and our balance sheet remains robust with total cash equivalents and restricted cash of RMB 4.5 billion. So given our strong cash position, as Ning mentioned, we are pleased to announce that our Board has approved a quarterly dividend of USD 0.22 per share. This dividend is payable on October 15, 2025, to shareholders of record as of September 30, 2025. So this marks our third consecutive semi-annual dividend payment, reflecting our strong financial performance and our commitment to delivering value to our shareholders. Looking ahead, we remain cautiously optimistic about our business. While we anticipate slightly higher volatility in the credit and regulatory risk environment, our more disciplined credit policies, enhanced risk management capabilities, and effective risk revenue model will position us well in this market environment. Our international business and digital insurance segments are expected to drive more revenues and margin growth in the next few quarters. For the third quarter of 2025, we are projecting revenue to be in the range of RMB 1.4 billion to RMB 1.6 billion, reflecting our disciplined approach to growth and risk management. Thank you very much.

Thank you. Operator, we are now open for Q&A.

Our first question comes from Bruce Oren of Black Lab Fund.

Congratulations on another strong quarter. Crypto assets have risen substantially this quarter. Does Yiren Digital intend to continue to increase crypto investments?

Yes. And yes, William, do you want to take a crack?

No, go ahead, Ning.

Okay. Yes, the crypto is gaining momentum, and we believe a good part of it represents the future of fintech. Yes, as a fintech player, we pay close attention to the innovation frontier. And so we will continue to work on this emerging asset class. And once we have more news to share, we will be happy to announce. I do expect that we will do more in this very important sector. William, do you have anything to add?

Yes. I just want to add, we increased our crypto position in the first quarter of this year, initially for the purpose of just treasury management. But as the situation with stablecoins and other crypto-related businesses in the market has matured, we are exploring different ways of using crypto or blockchain to support our core business. But it's still too early to tell, we are still in the exploration stage right now.

Yes. It's a key part of our strategic discussion and also strategic implementation going forward, I believe.

Do you hedge the risks of investing in crypto?

All right, actually...

We have a long-term view. Yes, we have a long-term view.

Do you have anything to add? I'm sorry.

No, no. I'm just saying I think the simple answer is, we do not hedge because it's really... well, we do not hedge directly on the crypto assets that we have. But I think we see that, as you can see in the market, the crypto asset price has been trending up, which is also our long-term view of the crypto price. Another reason we are holding onto those crypto assets is for strategic purposes, which we are still exploring. So we will update you as we make progress on that front.

It appears we have no further questions in the question queue. I will now hand over to management for closing remarks.

Thank you, operator. Now that concludes our earnings conference call. And if you have any questions, please feel free to contact our IR team. Thank you.

Thank you.

Thank you. That concludes this conference. Thank you for attending today's presentation, and you may now disconnect your lines.