Waterdrop Inc. (WDH) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by for Waterdrop Inc.'s Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Xiaojiao Cui. Please go ahead, Ms. Cui.

Thank you, operator. Hello, everyone. Thank you for joining Waterdrops Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that 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 under applicable law. Also, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a reconciliation 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 and General Manager of the Insurance Marketplace. Mr. Hu Yao, Co-Founder, Director and General Manager of Medical Cloud Funding and Healthcare; and Mr. Kevin Shi, our CFO. We will be available for a Q&A session after the remarks. Now I would like to turn the call over to our CEO, Mr. Shen Peng. Please go ahead.

[Foreign Language]

[Interpreted] Hello, everyone. Thank you for joining our fourth quarter 2021 earnings conference call. Since the beginning of the third quarter, the capital market has experienced a further volatility and the growth of the insurance industry has somewhat sit down. But no matter how the market changed we have been keeping our commitment to developing our business in customer-centric manner, leveraging technology to improve operational efficiency in insurance and health care business solidifying business fundamentals and creating sustainable long-term value for our shareholders.

[Foreign Language]

[Interpreted] Firstly, we will be confident in the future and be patient in the present. While the insurance industry has had various challenges in the last half year, we see those challenges as good opportunities for us to strengthen the fundamentals of the company. No matter the operating environment we have stayed true to our commitments and given our utmost efforts more proactively and relentlessly.

[Foreign Language]

As a top-tier player in China's insurtech and online health care market, we strive to make our business strategies more responsive and more full steam ahead. In Q4 2021, we seriously adjusted our business strategy and implemented devotedly in response to the changing environment.

[Foreign Language]

[Interpreted] Previously, Waterdrop pursued a fast growth in user base and total revenue while keeping ROI within a reasonable range. Starting in the second half of 2021, we have more pragmatically pursued a higher quality development to achieve healthy and sustainable growth. We have continued to invest in and strengthen our advantages in some businesses and meanwhile, strive to generate revenues and profits on other businesses.

[Foreign Language]

[Interpreted] Our fourth quarter results have affirmed the execution ability and the determination of our management team and the company achieved a non-GAAP profit in this quarter. We are still working hard and have also reinforced our ongoing commitment to creating value for our customers. We urge our staff in their daily work to continue focusing on sustainable development in our established business and strive to realize operating profit in non-GAAP terms as one of our objectives in 2022. Meanwhile, we will continue to innovate through our careful incubation initiatives in selected new areas as well as staying focusing on areas difficult but valuable to our customers in existing businesses. The challenges are huge, but we will remain steadfast to achieve breakthroughs in the pursuit of innovation.

[Foreign Language]

[Interpreted] Our new pace of operation also created an opportunity for our team to further improve our core competencies. It helps us develop stronger organizational capabilities while delivering better business performance. One of my new objectives is to optimize the leadership pipeline with high standards, strengthen organizational capabilities and enhance management ability to lay the foundation for cultivating more excellent managers at all levels in the next 3 years.

[Foreign Language]

[Interpreted] We are confident about the future, and we will remain patient today. We firmly believe in the long-term growth potential of China's health insurance market and a more prosperous future for Waterdrop. In our earnings release for the second quarter of 2021, we announced a 1-year share repurchase plan and the system we have carefully begun to implement the plan under the relevant compliance framework. From the launch of the repurchase plan to December 31, 2021, we have bought back around 1.3 million ADSs in total. And this year, we will continue to buy back shares. We plan to use these repurchase ADSs for our employee incentive plan in the future. In addition, based on our confidence in the company's future development and our dedication to invest in the company in the long run, our management also plans to use personal funds to purchase Waterdrop's ADS in due course pursuant and subject to applicable laws and the company's securities trading policy.

[Foreign Language]

[Interpreted] Secondly, we will continue to operate in full compliance and embrace 2022 with passion. In 2021, a few new regulatory guidelines and industry policies aiming to promote healthy development of the industry were released, which will contribute to consolidation of the industry in the long term. As a listed company, Waterdrop has continued to respond to the new regulatory guidance proactively and maintain good communication with the regulators. We also took the initiative to pivot our business model to ensure that we comply with the new rules. The regulatory rules have provided a clearer direction for the future development of the industry. In Q4, Waterdrop conducted business model upgrade, adjusted portfolio -- product portfolio and customer acquisition model. Looking ahead, we will continue to promote the healthy development of the industry proactively and firmly.

[Foreign Language]

[Interpreted] With the unique positioning of Waterdrop in helping promote inclusive insurance, we also share the same common prosperity path advocated by the government. We have established a solid business infrastructure through our product development capabilities, technological innovations, and unique synergies among our business segments. These initiatives helped us demonstrate our resilience and stability as the industry experiences a period of adjustment, with the recent dynamic recurrences, we believe that the demand for insurance protection will continue to rise in the future and consumers will be more inclined to turn to online channels, which present more opportunities for online insurance platforms like us. Despite the many short-term challenges that we are faced with, we are committed to strengthening our cost control and optimizing profitability, ensuring that we are on the right track to sustainable and quality growth in the years ahead.

[Foreign Language]

Thank you. In the year 2021, the China's insurance industry underwent a period of adjustment with downside pressure. According to the statistics from the CBIRC, the annual growth in gross written premium, or GWP, for the health insurance sector was only 3% in 2021 and the lowest in the past 10 years and the GWP saw a decrease of 3% year-over-year for both the third and the fourth quarter. In 2021, the total profit of life and health insurance companies increased by 47% year-over-year, 63 percentage points lower than the growth in the year 2020. So, to summarize, in short, transformation will be the key word that represents the current state of the insurance industry. Regulatory authorities have ensured a series of new policies that aimed at guiding the orderly development of the industry. So currently, many life insurance companies are proactively undergoing business restructuring and accelerating the pace of high-quality transformation. So, these insurance companies are returning to the mission of providing protection for users instead of simply pursuing market scale. Besides, they are focusing more on the profit contribution on new policies. So, in such environment, Waterdrop's FYP increased by 13.4% year-over-year to RMB 16.3 billion in the year 2021. Against the backdrop of industry slowdown and the new regulatory directions, we have transformed our user acquisition model from the first month discount price products to the first month original price product since the end of the third quarter. So, in Q4, we focus on adjusting and upgrading our business in many areas. The preliminary results showed that the substantial improvement in our operating efficiency has helped us turn operating loss into profit, with RMB 4 million adjusted net profit in Q4 compared to RMB 453 million loss in the third quarter. So next, I'm going to summarize the major progress we have made in Q4 from 3-year perspectives. Firstly, we have achieved a [indiscernible] transformation and have significantly improved our operating efficiency. Q4 is the first fourth quarter that the -- first month discount price model, while online short-term insurance products was terminated and replaced by the first month original price model. So, this resulted in a slowdown in our revenue growth but a significant improvement in our key operating efficiency indicators when compared with Q3. Our retention rate increased significantly, driving the take rate of our short-term insurance business to 33% in Q4. At the same time, the 1-year LTV of our new users increased materially. Since we changed our business model in Q4,. the month end user net promoter score has increased and the users are complaining rate has declined. So in Q4, we achieved remarkable results in the management of existing users. We established a unified user management platform that can integrate various marketing channels, including WeChat official accounts, WeChat mini programs, Apps and enterprise WeChat accounts. This allowed us to adopt a standardized approach to engaging users of different profiles, life cycles and from different marketing channels. We have modified our service platform to focus on insurance services, content inquiry services, health services and member services. We have also increased the yield engagement rate and online sales conversion rates of our users. In Q4, our 3-year repurchase rate for short-term products stayed at 59%, up by 14 percentage points compared to Q3, and the number of enterprise WeChat contact users reached 5.4 million in Q4, up by 14.6% compared to Q3.This will allow us to interact with our policyholders more recently and provide real-time services through our chatbot and customer service executives. And those enterprise WeChat contact users contribute the purchase of short-term policies with a total amount of RMB 16.6 million, an increase of 3 times compared to Q3. We made significant progress. We also made a significant progress in our self-developed AI robot for policy renewal, especially in recognition of our users' intention in renewable and human voice simulations and our short-term insurance renewable rate exceeded 78% in Q4, which reached the leading position in the industry. We also improved the conversion rate of our short-term insurance users to long-term insurance users and the average productivity of our long-term insurance consultants reached RMB 66,000 per month, an increase of 66% compared to Q3. So, the contribution of long-term insurance businesses to LTV reached 27% and up by over 10 percentage points compared to Q3, reflecting an increase in our effectiveness in maximizing long-term[indiscernible]of our existing users. Meanwhile, aligned with the new regulatory requirements and changes in the market conditions, we optimized our key insurance products, and we added 61 new products in the fourth quarter providing full-range health and life insurance protection for our users. And we also brought a faster and more reliable claim settlement experience to our users. The shortest claim settlement period was only 18 seconds, and the highest claim settlement amount in a single case was RMB 1.5 million in Q4. So, the enhancement of our customer value is our long-term commitment and is also one of our core [ competencies ]. Through the transformation of our business model on the operating efficiency enhancement of our existing user management and the continued upgrade on the innovations of our insurance products, we have made significant improvements in the quality of our users in various operating metrics. We believe this will lay a solid foundation for our matured business to achieve profitability in the long run. And secondly, we upgraded our technology capabilities and empowered our digitalization of the industry. In addition to the transformation of our own business model, we strengthened our investment in our AI-powered technologies. In Q4, for our AI-powered matching system which helps match the most appropriate sales staff for potential long-term insurance buyers, we conducted more than 20 rounds of system iterations and 3 algorithm architectural upgrades. This helps increase our long-term insurance premium by more than RMB [ 40 ] million. In addition, the self-developed screen-sharing interaction system applied on the telemarketing scenarios widely in Q4. The system now covers more than 2,000 sales staff, with roughly 1.5 hours of daily use per sales staff. The monthly productivity of the sales staff increased by 34%, driving an increase in our monthly premium by around RMB 20 million. The level of technology used for the system design and industry-leading standard and we have currently applied for 5 patents on the technology. Our investment in technology has helped improve our operating efficiency significantly. In Q4, our best performing sales staff achieved productivity of RMB 94,000 while our average productivity per sales force was 2.5 times that of the industry average. And I think the improvement in operating efficiency has given us even more confident in our technology investments. So, we also made a remarkable progress in exporting our technology to the insurance industry in Q4. For example, we have leveraged our SAAS-based CRM system and online customer management capabilities to provide user operation services to insurance companies. So, in Q4, we entered into cooperation with three insurance companies to utilize our technology and successfully helped them achieve tens of millions of RMB in premium income. Our next plan is to integrate our intelligent calling robot system with the existing business process and thereby empowering the industry with a stronger technology utilization. And thirdly, we continue to pursue new business innovations. In Q4, led by our newly joined and experienced team leaders, our online to offline brokerage business also showed solid progress. As of December 31, 2021, our brokerage team has set up three branches in Beijing, Guangdong and Shenzhen and established a sales team of nearly 300 people. This team generated a total premium income of approximately RMB 5 million in Q4. So we have -- we also empowered our brokerage team with a powerful set of technology-driven tools for business development through 4 systems, including the digital operating system, the product system, the training system and the marketing system. On top of our existing brokerage model, we are also actively exploring a more diversify and optimized offline brokerage model. In this year 2022, we plan to launch an independent agent model for high-end customers. This will enable us to establish the multilayered brokerage business model that can serve different target customer groups. In addition, we have innovated new insurance products to serve special customer groups. For example, for special groups such as tumor patients, we have launched a medicine plus insurance service model, which enables those customers to get medicines in a very convenient way at DTP pharmacies that we cooperate with, and enjoy insurance protection in accordance with their medical conditions and protection against medical safety. We have also launched accidental insurance products, covering the surgical patients, and we are developing critical illness insurance products and insurance against recurrence risk as well as tailored [many] medical insurances for those of asymptomatic carriers. So, in conclusion, as the first full quarter for our business model upgrade, we have made a good start in Q4 2021 by focusing on the improving -- by focusing on improving the quality of our users, optimizing the operating efficiency and strengthening long-term technology capabilities. We have to say that the insurance industry is still in the adjustment and transformation period and our transformation will continue. For the next quarter or two, our insurance business will still be in the process of transformation to the new growth model and the new operating model. As we continue to face the ups and downs in the short term, we are still optimistic about the long-term fundamentals of the insurance industry. And we believe that the competitive landscape will improve after further industry consolidation. So, this, together with our focus on long-term value creation through solid user management and technology core capabilities should help improve our operating and financial results after adjustment of one quarter or two, including reaching profitability in our matured business lines. I think that's all for my part. Next, I'm going to hand it over to Hu Yao for the update on the Medical Crowdfunding platform.

[Foreign Language]

Next, I will give you an update on the latest development of our Waterdrop Medical Crowdfunding and healthcare businesses as well as the progress of our R&D and technological innovations.

[Foreign Language]

[Interpreted] Firstly, let me update on our Medical Crowdfunding business. Our Waterdrop medical Crowdfunding business grew in an orderly manner, further reinforcing its market-leading position. As of the end of Q4, the cumulative number of donors reached 394 million, helping 2.36 million patients and pushing the cumulative funds raised to over RMB 48.4 billion.

[Foreign Language]

[Interpreted] To support the common prosperity initiatives, we began in-depth cooperation with local governments. Our cooperation with the Jinyun County government on [indiscernible], a medical insurance poverty relief project has been working well. In 2021, Waterdrop has assisted Jinyun County in the active identification and management process of more than 15,000 people in need of medical aid. According to our estimates, the platform helped reduce the out-of-pocket expenses of the needy by over RMB 14 million in 2021 or a year-on-year decline in such expenses of about 12%. In 2021, the number of people in poverty caused by diseases reduced by 77% year-over-year. The Jinyun project was rated No.7 in the list of best applications in digital society selected by the Zhejiang Provincial Development and Reform Commission.

[Foreign Language]

[Interpreted] In addition, in Q4, we cooperated with media and charity organizations, including China's Social Assistance Foundation, People's Daily Health App, Chinese Red Cross Foundation, and Henan Charity General Federation to explore the establishment of supplementary medical aid program. We also launched the Waterdrop Critical Illness Charity Aid Project, which operates under the self-aid plus charity-aid model to provide supplementary medical aid funds to patients with critical illness and in need of financial assistance. As of December 2021, there have been more than 200 key hospitals participating in the project, which helped to reduce the financial burden on healthcare expenses.

[Foreign Language]

[Interpreted] Next, I will update you on the progress of our patient recruitment business in the fourth quarter.

[Foreign Language]

In terms of scale, by the end of Q4, our Yifan Platform has undertaken more than 300 clinical trial programs for new drug registration. It has become one of the largest third-party patient recruitment platform for oncology clinical trials in China. The number of patients enrolled in clinical trials for chronic diseases and the common diseases has approached 100 in a single month and continue to grow rapidly. Nearly 10,000 patients turn to Waterdrop for help every day, and they are potentially high-business candidates for clinical trial projects going forward. In terms of cooperation with pharmaceutical companies, we have established partnerships with more than 40 innovative pharmaceutical manufacturers and CROs in China and worldwide, including Chia Tai Tianqing, CSPC, Innovent, Zai Lab and Labcorp Drug Development. We have been highly recognized by our partners.

[Foreign Language]

[Interpreted] Patient recruitment plays an important role in improving efficiency and shortening the R&D process in clinical development. According to the Director of the Institutional Office of Peking University Cancer Hospital at the 2021 Clinical Trial Symposium, patient enrollment directly affects the success of clinical trials. About 85% to 95% of trial delays are due to the failure to recruit qualified patients as planned, especially in the fields of oncology, cardiovascular, infection, et cetera. Our Yifan Platform can quickly and accurately recruit patients that are suitable for the trial projects. Our key competitive edge in the industry is built on several factors. First, as the largest community of patients with clinical illnesses in China and the largest medical crowdfunding platform, Waterdrop has a massive patient database and the ability to reach patients through various online and offline channels. Second, we have run a large number of high-quality projects. Powered by our AI technology and digitalization, we can provide accurate matching and efficient services on clinical trials, earning us good reputation and trust among patients.

[Foreign Language]

[Interpreted] Based on our large patient database, we can efficiently target patients with rare diseases. For example, in Q4, we collaborated with a leading multinational pharmaceutical company on a global multicenter Phase III clinical trial of a drug for rare diseases. The number of qualified patients for this trial was limited. However, we managed to identify hundreds of potential candidates for this trial from our patient pool. Most of these candidates showed a high willingness to participate in this clinical trial after we reached out to them as there is no particularly effective treatment for such disease in China. We have thus helped enroll appropriate patients for this clinical trial, and the first patient screened in China for that project was recommended by our platform.

[Foreign Language]

[Interpreted] As a platform driven by technological innovations, we continue to upgrade and optimize our intelligent patient recruitment system and integrate multiple sources of heterogeneous medical knowledge database. By leveraging our extensive medical knowledge and the leading technologies, including medical knowledge mapping and AI deep learning, we have developed medical OCR solutions and electronic medical record indexing techniques. This enabled automated extraction of key information from different unstructured medical text, including various disease names like hepatocellular carcinoma and cholangiocarcinoma, as well as treatment like chemotherapy, targeted therapy, and immunotherapy, thereby improving patient recruitment efficiency significantly.

[Foreign Language]

[Interpreted] Next, on technology innovation. We have consistently increased our investment in technology to better serve our customers and the business needs. In Q4, we have optimized the operations of our chatbot platform to improve user experience and sales force productivity and applied for 8 invention patents. By applying pre- and post-processing algorithms for our automatic speech recognition technology, we have improved the accuracy thus reducing surrounding noises. We have also applied industry data to conduct incremental pre-training our models so that they are adapted to our specific scenarios, thereby improving the model performance. We have applied a manual plus machine approach to establish a larger-scale language database, which further strengthens the semantic analysis and dialogue tactics learning capabilities. We have also built a proprietary TTS engine to customize the voice tone of the chatbot and adopted the manual plus machine approach to synchronize the voice output to make the chatbot's voice sound more human-like.

[Foreign Language]

[Interpreted] To date, our chatbot platform supports various business lines, including customer service, insurance policy search and renewal reminder. Among them, our customer service chatbot can solve more than 65% of questions raised by users. To improve sales force productivity, we started to build a manual plus machine coupling system, which enables us to transfer customer requests from chatbot mode to manual mode on a real-time basis under various scenarios, thereby improving user experience and productivity. In addition to promote the overall progress of the industry, we will export our AI capability to our insurance partners, helping them enhance their customer service capabilities and the utilization of sales leads.

[Foreign Language]

[Interpreted] Our [ refining ] operations through AI technologies. Technology has become the core driver in promoting the transformation of insurance businesses. We have made positive progress in terms of our insurance digitalization and intelligent transformation and are working to establish more digital competitive strengths.

[Foreign Language]

[Interpreted] Our proprietary AI-powered matching tool between the sales team and the users can match the most appropriate staff to provide services for each user, based on LPs historical service data and the user group, they are good at serving. In contrary, under traditional online marketing and telemarketing, service staff essentially reach out to users on a random basis. We have upgraded our smart matching system to Version 3. In Version 2, the system was based on LPs basic attribute and historical outbound calling records to match the most appropriate staff for each user. Due to the limitation on the number of calls LPs can dial out each day, this allocation module could only achieve a partial optimal solution. In Version 3, we have introduced timing information and preset allocation mechanisms for LPs, thus leading the allocation module closer to our comprehensive optimal solution. This substantially improves our user satisfaction, further increases the value of our sales leads, and enhances the efficiency of our entire service system.

[Foreign Language]

[Interpreted] Through 3 adjustments to our algorithm architecture and more than 40 rounds of model optimizations, we have created thousands of data features and embedded 7 patented technologies in our smart matching system in 2021, making it an industry-leading, stable and highly efficient sales leads allocation system. Compared with the traditional sales lead allocation model, our smart matching system has improved the APL by 40%. Since its launch, the system has helped increase our long-term insurance premiums by more than RMB 60 million, which is equivalent to a daily increase of RMB 200,000 to RMB 300,000 per day. The smart matching has formed a core technological advantage in Waterdrop's smart insurance telemarketing service system.

[Foreign Language]

[Interpreted] From our extensive data research, we found that some users will also pay attention to other types of products when they purchase a particular insurance product. Hence, in the process of purchasing, we will predict whether the user is interested in other product types based on the user's profile. We will then provide recommendations on additional insurance products in our platform for the user's own choice. This attempt will not only address the users' pain points in choosing our portfolio of insurance products that satisfy their protection needs but will also help increase our insurance premiums by 7%.

[Foreign Language]

[Interpreted] This concludes my part, and then let me turn over the call to Kevin, our CFO, to discuss our fourth quarter financial performance.

Thank you, Hu Yao. Hello, everyone. I will now walk you through our key financial results for the fourth quarter of 2021. Before I go into details on the financial performance, please be reminded that all numbers quoted here will be in RMB. And please refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis. Our net operating revenue decreased by 27.3% year-over-year to RMB 604 million from RMB 830 million and decreased by 25.6% on a comparable basis, which means without taking into account the management fee income from mutual aid business, which we already ceased in the first quarter of 2021. The decline in revenue was due to the decrease in FYP outweighing the improvement of our take rate year-over-year. In recent months, we've seen our take rates stabilized and began to pick up resulting from the improvement in our business quality. Operating costs and expenses for quarter 4 decreased significantly by 38.6% year-over-year to RMB 678 million. On a quarter-over-quarter basis, operating costs and expenses decreased significantly by 47.5% compared to the last quarter, showing our measures on cost control have had a significant effect. In the fourth quarter, we took a series of measures to reduce operating costs and expenses, including reducing spending and improving the effectiveness and ROI of traffic acquisition, optimizing our organizational structure, reducing the redundant headcount of employees and improving operating efficiency. To break it down, the operating costs were RMB 197 million, a decrease of 21.4% year-over-year, mainly due to the decrease of RMB 66 million in professional and outsourced customer service fees, partially offset by an increase of RMB 19 million in personnel costs as our consultants and the insurance agents team expansion compared to the last year. Sales and marketing expenses decreased by 63.8% year-over-year to RMB 441 million for the fourth quarter of 2021. The decrease was mainly due to the decrease of market expenses to third-party traffic channels by RMB 485 million, partially offset by the increase in payroll and related expenses for employees involved in sales and marketing functions. As we announced in the last earnings call, we would reveal such sales and marketing expenses maturity, and we managed to deliver those results this quarter. On a quarter-over-quarter basis, sales and marketing expenses decreased by 69.2% from last quarter. Along with sales model upgrade, we have reduced reliance on third-party traffic through more refined operational management and strict cost control. G&A expenses increased by 25.9% in quarter 4 to RMB 149 million year-over-year and by 33.5% quarter-by-quarter, mainly due to an impairment loss of RMB 39 million provided for the prepayments and offset by a decrease of RMB 2.5 million in share-based compensation expenses compared with last quarter. R&D expenses increased by 34.4% to RMB 91 million year-over-year and decreased by 11.6% quarter-by-quarter. We uphold technology-driven innovation and continue to invest in R&D in a disciplined manner. In the fourth quarter, we incurred a net loss of RMB 71 million on a GAAP basis while generating adjusted net profit of RMB 5.9 million compared with a net loss of RMB 404 million, and adjusted net loss of RMB 191 million in the same quarter of last year. Heading into 2022, we plan to continuously improve our operating efficiency and control our costs and expenses. We expect to achieve non-GAAP profit for established business, which means existing businesses as of our IPO date, for the year of 2022. Such outlook is based on the current market conditions and reflects our preliminary review and estimates, which are all subject to changes. As of December 31, 2021, our cash and cash equivalents and short-term investment balance increased to RMB 2,787 million, increasing RMB 176 million, or -- 6.7% from the end of the third quarter of 2021, as we started to generate positive operating cash flow in the fourth quarter. For detailed financial data, please refer to our press release on our IR website. This concludes our prepared remarks. I will now hand it over to the operator to open the call for Q&A. Operator, we are ready to take questions now. Thank you.

[Operator Instructions] We will take our first question today from Qing Mao of CICC.

This is Qingqing from CICC. Congrats on the results. I have 2 questions. The first is about the operation of existing customers. Could you talk more about the renewal rate? What's the trend? And what's your strategy to further serve the existing customers? And the second question is, what did you do to drive the significant improvement in profitability? Can we expect this operating margin to continue in 2022. That's all for me.

Okay. This is Yang Guang speaking. Thank you for your question. I think in terms of renewable, the premium renewal rate improved to 89% in December of 2021 from 52% in September 2022 -- 2021, up by 43%. So we have achieved a great improvement in our renewal rate. I think our strategy to improve renewable is focused on 3 main areas. One is that we improve our renewables by upgrading our renewable products. For example, we increased the coverage for users and providing premium discounts for customized policyholders. And secondly, we provided renewal users with more product coverage options through our differentiated add-on products, a strategy that made our premium renewal rates up by 5%. And thirdly, we support users with diverse terms of payments such as auto renewal, monthly payment or annually payment and reach the manual renewal users through message and phone calls. So, in terms of the LTV per user, we continue to convert our users and increase per user LTV mainly through Enterprise WeChat and O2O model. So, the LTV of Q4 was up by 93% compared to Q3. I hope that answers your question. And for your next question regarding the operating margin, I'm going to hand it over to our CFO, Kevin.

Thank you, Yang Guang. Thank you, Qingqing. Thank you for your question. As a successful rollout of the cost control plan, we actually -- we have seen 2 consecutive quarters effective cost control and the profitability enhancement. Compared with quarter 3, our total operating costs and expenses further reduced significantly this quarter. A quarter-over-quarter decline of 47.5% in total costs and expenses was mainly due to, first, a decrease of 69.2% saving in marketing expense, and second is 33.5% decrease in operating costs quarter-over-quarter. In terms of our marketing expense, if we look at our earnings release in previous quarters, we find that our sales and marketing expenses in quarter 2 exceeded RMB 1.2 billion, of which about 80% was the traffic acquisition cost. In quarter 3, sales and marketing expenses was around RMB 781 million, of which around 68% was our traffic acquisition cost. So, we can see that the various measures of our refined operations have produced certain results in quarter 3. But with our continuous efforts, we have achieved more remarkable results in the first quarter. Sales and marketing expenses significantly reduced to RMB 241 million and only less than 1/3 of sales and marketing expenses were incurred for traffic acquisition. Regarding measures to control company expenses, in terms of sales and marketing expenses, our measures include but not limited to, first, further reduction in marketing expenditure and [ U.S. ] stricter criteria to select traffic acquisition platforms. And second, we are also leveraging our AI-empowered platform to conduct more intelligent and targeted marketing. And in terms of operating costs, specific measures include, first, reviewing key tasks and our business procedures to identify where and how to optimize. And the second, integrating organizational functions with high synergies. And third, strengthening the control over selection of suppliers. And the fourth, [merging certain offices who are] moving to areas with more reasonable rents. So, we are moving faster on the right track to achieve breakeven, and we have delivered good results towards [particular] objective for the 2 consecutive quarters. We originally plan to breakeven in terms of -- in the year of 2023. We have already increased our efforts to control costs and expenses. And now we're already made profits in non-GAAP terms in quarter 4. Marketing expenses, which used to be our largest expense item, have been significantly reduced in the third and fourth quarter. And we also managed to control over costs and company-wide. So going forward, we expect this trend to continue in year 2022. So, our goal is that our established business will make profits for the full year of 2022 on a non-GAAP basis. Thank you.

Next question from Michael Li of Bank of America.

This is Michael Li calling from Bank of America. My question is about the quality of your earnings and also the volume growth. We've seen very strong quality improvement in fourth quarter last year, and also the cost control last year, and fourth quarter led to the first profitable quarter on a non-GAAP basis. But we also see the decline -- year-on-year decline and quarter-on-quarter decline of your commission income growth. I know there is kind of seasonality there, and I know that last year second quarter to fourth quarter, sector premium growth was weaker than first quarter last year. And we still want to know that what is the target of your volume growth as the first year premium growth next year? And how are you going to achieve that kind of target? This is my first question. The second question is that I know that you are going to charge on Waterdrop [indiscernible]. So, what is the purpose of this kind of change of policies? Thank you.

Thank you for the question. I think as mentioned earlier, the entire industry is undergoing cyclical adjustments. So, I think the key reason is that the old growth model focusing on scale expansion cannot adapt to the current market conditions and the launch of stricter regulatory policies has intensified the industry adjustment. And so the tightening regulations and cyclical adjustments have made the competitive environment of online insurance services more favorable to our company. So, for example, the number of peers have exited the market and our external customer acquisition has improved. So, under this environment, our accumulated human resource insurtech capabilities and advantages in lower-tier cities will enable us to be well positioned for the future growth, from over the entire insurance industry exploring new growth model, which will benefit companies raise stronger innovation DNA just like us. So, in the meantime, we will create new growth drivers by developing our open platform to offer more services to empower the industry. I think after 5 years of exploration, we have accumulated strong technology and capabilities in the insurtech area. Now we're building our open platform to offer all the technology service to the partners in the market. So we believe only the companies with larger user group and the ability to tap into the customer value are able to navigate the unfavorable industry cycle to demonstrate their business resilience and adaptability. So [ every member ] will be the ones that can transform and upgrade the business as early as possible, making necessary strategic adjustment and actively respond to regulatory calls and the [ licensing ] in long run. So, simply a pursuit of growth is not the current optimal solution. So, to answer your question regarding the SIP target, I think we expect our revenue growth will stabilize this year where our commitment to cost control remains unchanged, and in fact, our profitability improvement will continue to deliver. So, this means that the slowdown in growth due to the business model transformation and industry adjustment has basically reached an inflection point in the near future, and the company will follow with a healthier and most sustainable model for the future development. I hope that answers your question.

We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Have a good day.