Huize Holding Limited (HUIZ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Huize Holding Limited's Fourth Quarter and Full Year 2019 Earnings Call. [Operator Instructions] Now I'd like to hand the conference over to your speaker host today, Mr. Jack Wang, Vice President of ICR, the company's investor relations partner. Please go ahead, Jack.

Thank you, operator. Hello, everyone. Welcome to Huize Holding Limited's Fourth Quarter and Full Year 2019 Earnings Conference Call. The company's financial and operating results were released by our newswire services earlier today and are currently available online. Participants on today's call will include our Founder and CEO, Mr. Ma Cunjun; and our CFO, Ms. Tracey Chow. Mr. Ma will start the call by providing an overview of the company and performance highlights for the fourth quarter of 2019. Ms. Chow will then provide the details on the company's operating and financial results for the period before we open the call for your questions. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on the IR section of our website at ir.huize.com. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under generally accepted accounting principles in our earnings release and filings with the SEC. With that, I will now turn the call over to our Founder and CEO, Mr. Ma Cunjun. Please go ahead, sir.

[Foreign Language]

[Interpreted] Hello, everyone, and thank you for joining Huize Holding Limited Fourth Quarter 2019 Earnings Conference Call. Before we begin discussing our operating results, I would like to extend a warm welcome to our new shareholders. You have enabled us to successfully complete our IPO despite the unfortunate global outbreak of COVID-19, and the challenging capital market conditions, which occurred in February as a result. Moreover, as today is our first ever quarterly earnings conference call as a publicly listed company, it is also an important milestone for both Huize and our shareholders alike. For our new shareholders, I would like to provide a quick introduction to Huize. 14 years ago, I founded this company with a mission to become a trustable online insurance product and service platform for clients. Today, we are proud to have secured a market position as a leading independent online insurance product and service platform in China. We are also proud of our technology-enabled and data-driven online platform, which is dedicated to serving a younger generation of insurance clients and providing solutions throughout the full life cycle of their insurance needs.

[Foreign Language]

[Interpreted] The success of our company is driven by our ability to connect those insurance clients and insured partners through our dual-engine business model, powered by our closed-loop online technology platform. This model covers the entire insurance life cycle, provides one-stop service to insurance clients and creates a seamless digitalized insurance transaction experience. On the insurance client side, we offer over 1,300 types of insurance products through our platform, with a focus on long-term life and health insurance products. On the insurer side, we empower insurance companies to more efficiently reach a large, traditionally segmented retail client base, and in doing so, augment their insurance sales. By the end of 2019, we had served approximately 6.3 million insurance clients on an accumulated basis, and worked with over 7 state insurance partners, illustrating the online strength of our value proposition for both insurance clients and the insurers.

[Foreign Language]

[Interpreted] Following the successful completion of our IPO, we have turned our focus to 3 key growth strategies going forward: first, expanding our customer base; second, accelerating customer engagement; and third, ramping up our customer conversion efficiency. So for customer base expansion, we intend to leverage our enhanced brand awareness resulting from our successful IPO to improve our direct customer acquisition capabilities and expand our user traffic channel partnerships. For customer engagement, we plan to set up offline service centers in select strategic locations to enhance the synergies between online and offline operations, enhanced client engagement and also a broader range of insurance products, which will enable us to further increase customer wallet share and invest in customer lifetime value. For customer conversion efficiency, we will focus on investing technology, especially on the data analytics front. More specifically, these types of investments have helped to improve our capabilities in customer conversion as well as in area of risk management, marketing and overall operating efficiency.

[Foreign Language]

[Interpreted] In 2019, total gross written premium, or GWP, facilitated on our platform exceeded RMB 2 billion, which grew 114.1% year-over-year. Total operating revenue reached RMB 993.3 million, which increased to 95.2% year-over-year. Total adjusted net profit reached RMB 109.9 million, which increased 265.1% year-over-year. In summary, we are much encouraged by our 2019 results. We will maintain our dedication to serving the needs of insurance clients as we strive to become a leading go-to gateway for China's online insurance industry in the long term.

[Foreign Language]

[Interpreted] I would now like to take a moment to update everyone on how the recent global outbreak of COVID-19 is impacting our business. Mostly, the outbreak has caused the government to impose a series of preventive and quarantine measures across the country, both of which have caused a significant disruption to the overall economic activity in China. At Huize, we place the highest priority on the health and the safety of our employees and quickly implemented a series of short-term measures to allow our staff to work from home. By February 3, our IT system was able to support our staff to work remotely from home. We were pleased to welcome back the majority of our staff to the workplace on March 23, following the successful containment of the outbreak in China.

[Foreign Language]

[Interpreted] This concludes my prepared remarks for today. With that, I will now turn the call over to our Co-CFO, Tracey Chow, who will provide an overview of our key operational and financial highlights for the quarter. Thank you, Mr. Ma, and hello, everyone. So let me start with our key operational metrics. Gross written premium, or GWP. Total GWP facilitated on our platform in the fourth quarter of 2019 reached RMB 642.5 million, which grew by 108.4% year-over-year. And the total operating revenue in the fourth quarter of 2019 increased by 44% to RMB 258.3 million from RMB 179.1 million in the same period of 2018. The growth of total operating revenue was driven by the growth in our brokerage income. Our brokerage income grew to RMB 253.6 million in the fourth quarter of 2019 from RMB 177.5 million in the same period of 2018. The strong growth in brokerage income was primarily due to the growth in GWP we facilitated and enhanced product mix. The percentage of life and health products in the fourth quarter of 2019 took a higher portion compared to the same quarter the last year, accounting for 93.7% of the total GWP facilitated. The reason why the growth of brokerage income is relatively slower than the growth of GWP is firstly because of the higher percentage of renewal premiums in Q4 2019. And secondly, because of the increased sales of annuity products. During Q4 2019, we adapted proactively to search in demand from customers in the market as a result of the regulatory changes and the skewed up sales of annuity products. As a result, our platform facilitated a total and insurance -- total annuity insurance product GWP of RMB 175.6 million, accounting for 27.3% of the GWP facilitated in the same quarter, even though the first year insurance brokerage commission fee rate we charged for the annuity insurance products which are lower than that of our main focus critical units insurance products. We believe the introduction of annuity helped to diversify our product mix and increased our clients' lifetime value. Cost of revenue in the fourth quarter of 2019 increased by 40.3% to RMB 159.9 million from RMB 114 million in the same period of 2018 due to the substantial growth of our business scale. The majority of the increase is attributable to the increase in channel costs paid to our user traffic channels for indirect marketing, and to a less extent, the increase in personnel costs related to our insurance consultants for direct marketing. Specifically, channel costs in the fourth quarter of 2019 increased to RMB 138.3 million from RMB 102.2 million in the same period of 2018. The channel costs as a percentage of revenue from our indirect to customer channel decreased by 75.5% in Q4 2018 to 71.5% in Q4 2019. Personnel costs related to our insurance consultants for direct customer acquisition in the fourth quarter of 2019 increased to RMB 21.6 million from RMB 11.8 million in the same period of 2018. The personnel costs as a percentage of revenue from our direct customer acquisition channel increased from 28% in Q4 2018 to 35.9% in Q4 2019. The increase in personnel costs is due to our hiring of more talent to support the business growth factors in 2020. Selling expenses in the fourth quarter of 2019 increased by 96.6% to RMB 61.8 million from RMB 31.4 million in the same period of 2018. Selling expenses as a percentage of total operating revenue increased to 23.9% in the fourth quarter of 2019 compared to 17.6% in the same period of 2018. The increase in selling expenses as a percentage of operating revenue is partially attributable to the investment in brand value in Q4 2019, in conjunction with the company's IPO plans, and partially due to the increase in advertising costs for direct customer acquisition. General and administrative expenses in the fourth quarter of 2019 also increased by 91.7% to RMB 34.5 million from RMB 18 million in the same period of 2018. The increase is mainly due to the increase in the share-based compensation expenses, which accounted for 63.6% of increase in G&A expenses year-over-year. The share-based compensation expenses in G&A grew to RMB 10.5 million in the fourth quarter of 2019 from RMB 0.1 million in the same period of 2018. If we exclude share-based compensation expenses, G&A as a percentage of total operating revenue declined to 9.3% in the fourth quarter of 2019 compared to 10% in the same period of 2018. Research and development expenses in Q4 2019 increased by 61.6% to RMB 11.8 million from RMB 7.3 million in the same period of 2018. The increase in R&D expenses is primarily due to the increase in R&D headcount, which grew by 74.5% compared to the end of 2018. Net loss for Q4 2019 was RMB 7.5 million as compared to a net loss of RMB 4.2 million in the Q4 2018. Adjusted net profit for Q4 2019 was RMB 6.1 million as compared to RMB 9.3 million in Q4 2018. In terms of our financial position, we believe we currently have a robust balance sheet, and we are well capitalized to withstand the short-term challenges brought on by the global COVID-19 pandemic. We have also raised approximately USD 55.9 million in total gross proceeds from our IPO. For the first quarter of 2020, we currently expect total operating revenue to be in the range of RMB 213 million to RMB 215 million. This forecast reflects the company's current and preliminary view on the market and operational conditions, which are subject to changes. So here, I can just conclude our prepared remarks for today. We will now open up for the call to the Q&A.

[Operator Instructions] Our first question comes from the line of Dan Tian of CICC.

[Foreign Language]

Well, I will defer the first question to our COO, Mr. Jiang.

[Foreign Language]

[Interpreted] Since the outbreak of the COVID-19, we see that the inquiries for insurance products are actually growing. And we see that clients are having more appetite for short-term insurance policies. As for the long-term insurance policies, it involves multiple factors, including people's forecast on their income and their awareness of long-term health risk. So the impact on the long-term policies is partly mixed.

[Foreign Language]

[Interpreted] We see -- based on what we see today, the policy changes do not simply exclude some critical units, such as thyroid cancer, exclude the thyroid cancer from critical units. Instead, the new regulation made more detailed classifications on different types and levels of critical units. So we believe that this change would benefit in terms of more flexible risk pricing, which will be better adapted by diversified customer groups. So we think that the changes -- the update of the policy will encourage the long-term development of online insurance industry. [Foreign Language] The third question is about our productibility. So if you look at the Q4 numbers, as is -- because we are selling more high premium products, so the customer -- our consultants' productivity in terms of premium has been increasing. However, if you look at the numbers of policies that our consultants sell every day, this number decreased in -- slightly decreased in Q4. This is because the annuity products we sell, we scaled after sale in Q4 of high end premium, and it takes more time to convert them. And also, as I mentioned earlier, we recruited -- we increased the recruiting of our consultants in Q4 2019 to better cooperate with our business growth perspective in 2020. So there is a temporary drop in terms of the numbers of policies that are our consultants sell a person per day. But if you look at the broader amount, it will increase.

[Operator Instructions] Our next question is from the line of [indiscernible] Partner.

[Foreign Language] So let me translate my 4 questions into English. The first is about the product mix and the typical terms. So we understand that the company expanded its product portfolio from critical unit focused to annuity. So could you please elaborate what's the rationale behind it? And what's the typical commission rate schedule on annuity and critical units products? The second question is about acquisition costs -- or acquisition channel. We understand that the indirect channel contributing less than last year during the fourth quarter of 2019. So what's the customer acquisition cost in terms of dollar amounts for direct channel and indirect channel, respectively? The third question is about, we want to understand the demand for ongoing insurance distribution versus off-line, especially during the outbreak of the COVID-19. The fourth question is that we understand the company has some plan or strategy to develop offline customer acquisition. So I appreciate if you can elaborate a little bit more about what's the measures you would like to take in the future?

So I will take the first 2 questions. And Mr. Jiang will take the second -- the third and fourth questions. So the first question is about our product mix. So our mission and our ultimate agenda is to provide our customers whatever they need in the appropriate and cost-efficient way. Yes, in the Q4 2019, we scaled up the sales of annuity. That is because we see the market demand for annuity surge because of some policy changes. That's why we made this kind of adoption. Going forward, critical units will still be one of our core products and we will continue to focus resources on critical units. However, as we -- as our clients are getting more mature, sophisticated and more wealthy, we will provide them annuity products as one of our strategic products in the pipeline. And we will also introduce products such as medical insurance to cooperate with our critical unit products as a good complement to better protect our customers from long-term health and -- life and health risk. So this is my question for your first -- this is my answer to your first question. And in terms of customer acquisition costs for direct and indirect, what I can say is the customer acquisition costs for indirect channel is higher -- definitely higher, than the direct channel. That is because we engaged social media KOLs to do the heavy lifting work of customer acquisition and customer education. That's why we pay them more. But we will not disclose the specific customer acquisition costs because this is one of our core business -- sensitive business information. So I defer the next 2 questions to Mr. Jiang.

[Foreign Language]

[Interpreted] Online and -- companies with online and off-line models are educating their customers separately in their own ways. Traditional insurance companies with offline agent team, they use more off-line approach to educate the customers about the virus outbreak. However, because of the physical constraints, insurance companies are taking more measures to come up with online tools to approach their customers. But we do see that some of their management tools are not that sophisticated yet. However, we think that the coronavirus will definitely encourage customers to go online, to learn about insurance, and there will be more transactions completed online. So there will be emerge for the online and offline business models in the future. And talking about our off-line strategy, we are setting up our off-line operation not because we think our online model is slowing down, of course. It is because we see an increasing number of high net worth clients in our client base. And having off-line operation composed of very elite members will help the company to better serve these high net worth individuals. With this about -- with this above, we hope to be able to sell more complicated products, increase wallet share and customer referrals and that increasing customers' lifetime value.

[Operator Instructions] As there are no further questions as of this time, I'd like to hand the conference back to our management. Please continue.

Okay. I think if there is no more questions, we will conclude our conference call here. And thank you very much for your time and support. We hope to talk with you in the next quarter, and please stay safe and healthy. Thank you all.

Ladies and gentlemen, that concludes our conference for today, and thank you for participating. You may now all disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]