Waterdrop Inc. (WDH) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by for Waterdrop Inc.'s Third Quarter 2022 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 Ms. Xiaojiao Cui. Please proceed, Ms. Cui.

Thank you for joining Waterdrop's Third Quarter 2022 Earnings Conference Call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities 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 may 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 VP; Mr. Hu Yao, Co-Founder, Director and VP; Mr. Ran Wei, Partner and the General Manager of the Insurance Marketplace; Mr. [indiscernible], Partner and General Manager of Medical Crowdfunding and Patient Services; Mr. [ Richard Chen ], Board Secretary and VP. They will be available for a Q&A section after the remarks. Now, I would like to turn the call over to our CEO, Mr. Shen Peng. Please go ahead.

[Interpreted] Hello, everyone. Thank you for joining our third quarter 2022 earnings conference call. During the third quarter, we have seen increasing downside risks in the global economy as well as uncertainty regarding the domestic economic recovery. Nonetheless, the recovery in domestic demand has recently gained momentum, and we believe that the fine-tuning of COVID control measures will unleash a rebound in private consumption, providing solid support to revive the domestic economy. This trend will enable the insurance industry to return to a value growth cycle and improve the business outlook for the medical and pharmaceutical industry. Against this backdrop, Waterdrop continued to exhibit strong resilience and adaptability and maintain good business momentum in the third quarter, with revenues increasing by 10.1% on a quarter-over-quarter basis. Following our turnover -- following our turnaround in the final quarter of last year, we have managed to achieve a healthy level of profitability in every quarter of this year. In the third quarter, our GAAP net profit reached RMB 170 million, confirming that our business has entered into a phase of steady profitability. As of the end of September, our cash and cash equivalents and short-term investments increased to RMB 3.6 billion. Even taking into account our share repurchases, we were able to generate a positive cash inflow of RMB 300 million in the third quarter. Our ample cash reserves and our ability to generate positive cash flow put us in a strong position to withstand the changing external environment. Our remarkable operating results and evolving business trends over the past 3 quarters demonstrate that we have entered into a phase of healthier and more sustainable business growth. Establishing a solid foundation for future business development, our operating efficiency and business quality have also improved steadily. As such, we have delivered on our commitment to achieve healthy and sustainable profitability ahead of schedule based on the time line we set at the beginning of this year. This reflects management's determined strategic planning and efficient execution. Looking into the fourth quarter and beyond, we will continue to pursue steady progress in our business development efforts, deepen reform of our business and make appropriate investments in new businesses while proactively exploring new business models to achieve healthy growth. Through these efforts, we aim to achieve top-notch and sustainable long-term business growth. As a leader in the medical crowdfunding industry, our subsidiary, Waterdrop Medical Crowdfunding, is committed to maintaining disciplined operations and driving the healthy development of the ecosystem. In this quarter, we continued to collaborate with the judiciary hospitals and industry partners to crack down unauthorized fundraising activities at the end of August. Waterdrop, once again, worked closely with the place in Shandong province to crack down on a case of fundraising fraud perpetrated by malicious intermediaries. Through our stringent review process, together with the big data algorithms and AI technologies developed by our risk management team, we have developed a system that can identify unauthorized fundraising activities instantly and effectively. After several months of investigations and on-site visits, we collected a large volume of evidence, which successfully helped the police to solve the case and take legal action. Following various effective crackdown measures, there has been no malicious unauthorized fundraising activity detected on our platform for several consecutive months. In the third quarter, we deepened our efforts to reform the business strategy for our Waterdrop Insurance Marketplace. As a result, we improved our business quality and continued to upgrade our product and service offerings while further accelerating our pace of technological innovation. This strategy adjustments enabled us to achieve higher quality operating results. We are also proactively pursuing broader innovation opportunities in the medical and health care industry. We continue to expand our outreach by leveraging the strength of existing businesses, including our high-performing patient recruitment business and our nascent CRO business, which we continue to explore and develop. Through these efforts, we aim to provide our users with lifetime products and service coverage to enrich our ecosystem. In the third quarter, we carried out our share repurchase program firmly. We repurchased approximately 1.09 million ADS in total, and we are continuing to execute the program prudently. As of the end of September 2022, we had cumulatively repurchased approximately 5.8 million ADSs from the open market, for a total consideration of approximately USD 8.5 million. We will continue to focus on the interest of our shareholders. In this September, we announced the 1-year extension of our repurchase program, with the maximum repurchase amount increased to USD 80 million. This demonstrates our strong confidence in our corporate value and our long-term sustainable development. To conclude, we will continue to maintain ample cash liquidity regardless of the industry environment. We continue to have a confidence and a patient outlook on the industry and our own development. We will remain committed to our mission, stay focused on user value, solidify our business fundamentals and pursue continuous advancements, thereby building up our strengths to enter a new phase of development. I will pass to Ran Wei to discuss the development of the Waterdrop insurance business for Q3.

Thank you, Shen Peng. Hello, everyone. Let me give you an update on our insurance business development. In the third quarter, the market for life and health insurance in China remained [indiscernible], with no significant improvement in premium growth, the continued resurgence of COVID-19 and most business pension and policy reform in the life and health insurance industry. At the same time, the demand for protection-type products remain soft, which imply that both the demand and supply side of the market are somewhat subdued. Meanwhile, future volatility in equity market and insurance risk and ever-growing operating pressure, the overall earnings of the insurance industry declined in the first 3 quarters of 2022. Against this backdrop, we continued to improve our operational efficiency, boost the quality of our business and optimize existing offerings. We have proactively explored new customer acquisition channels and persistently engaged in product innovation to achieve long-term sustainable business growth in spite of the industry's [indiscernible] tone. We achieved an industry-high GAAP net profit of CNY 170 million in quarter 3. And our key operating metrics continue to reflect the high quality of our business relative to the industry. Now, I will walk you through the performance of our insurance business on forefront, the first steady progress on our business model upgrade. In quarter 3, the quality and profitability of our insurance business continues to improve, thanks to our persistent optimization of products and user experiences. Our first year premiums increased by 8.4% from quarter 2. We revamped transaction processes, and [indiscernible] analysis results in improved either perception of our service quality. The number of long-term insurance policyholders have reviewed their policies, and the LTV contribution of our products has first increased steadily. In terms of existing user management, we further refined our market [ hub ] platform operational model and cost, [indiscernible] the sales conversion chain across all [indiscernible]. To satisfy the lifetime protection needs of users, we have enhanced the overall [indiscernible] efficiency. As such, the user repurchase rate remains above 50% and further increasing quality rate at the same time. To identify user needs more accurately and efficiently, we continue to optimize the algorithm model based on hundreds of millions of user profile. The number of users converted from short-term insurance products to long-term products increased by 14% from quarter 2. And the sales [ activities ] for in-house LP on incidents and [indiscernible] marketing was 2.5x the industry average. Our new customer acquisition model has achieved an [ initial portfolio ] in quarter 3. A number of followers of our [ video ] accounts decreased by 110% quarter-over-quarter, and the total insurance premiums originated from this account decreased by 219% sequentially. Leveraging our [ video conference ] and the sales conversion capability across the supply chain, we have acquired a large volume directed [indiscernible]. And with this, our brilliant traffic from state channel. This helped decrease our [indiscernible] by 180% quarter-over-quarter in addition with improvement of our capability both in long-term insurance planning and our long-established sales experience. We have cooperated with more external practical providers to acquire greater numbers of high-quality leads, which have helped to drive sales conversion for our long-term insurance products. In quarter 3, the sales productivity per lead under this partnership increased by 177% sequentially. Second, exploring new customer acquisition channels to drive sustainable business growth. In quarter 2, we set up a dedicated second-level business unit, which adopts the insurance plan bundle to promote the online brokerage business. In quarter 3, we mainly focused on building up the talent and their capability [indiscernible], targeting the characteristics of customer needs under the insurance plan bundle. We developed operational standards for our [indiscernible] user management systems. We also leveraged our major [ leading trading and software video ] platform and our [indiscernible] company to facilitate the customers' acquisitions and explore a one-on-one customer service bundle. These efforts have helped diversify our suite of insurance accounts, both user reach and user experience. Compared to the last quarter, the premiums and the revenue generated from this [ in units ] increased by 42% and the business [indiscernible], respectively. Going forward, we will continue to [ pace ] our online brokerage team and strengthen our content creation capability. We will gradually expand the commercial footprint on a larger scale based on the proven model. Since the beginning of this year, we have stepped up our efforts to develop the off-line [ profitability ]. In quarter 3, we launched the WFind, or Waterdrop Family Insurance Needs Diagnosis, which is the dedicated system that can help brokers [ find new ] customer needs and provide appropriate insurance plan. The customer-centric WFind system empowers brokers to identify the protection needs of each family based on family size, household income and their expenditure and [indiscernible] and then guide them to offer more professional, [indiscernible] and objective customized insurance solutions that can [ buy ] each family's protection needs. At the end of September, our off-line [ brokers increased spend ] with [ additional model ] line for given staff and reaching [ a total insurance in ] trading of more than [ RMB 100 billion ] or up by 52% quarter-over-quarter. We have extended our off-line brokerage business to [indiscernible], including Beijing and Shanghai. Going forward, we will optimize the [indiscernible] ecologies of our established network and steadily expand our off-line brokerage business to other [indiscernible] prospects. The third, production innovation. To meet the protection needs of customers with preexisting conditions, in quarter 2, we launched Waterdrop Blue Ocean, a series of critical illness product with a waiver of health declarations, further expanding the user group of our CI insurance products by removing the [indiscernible] of a [indiscernible] for the handling of the patients with chronic diseases. The product series has [ won wide ] recognition in the market and generated sizable sales. Similarly, in the third quarter, we launched a series of [ redefined ] coverage medical insurance products, waiving some health declaration. This new [indiscernible] product showcases our business [ venture ], expanding our offerings to customers with preexisting conditions while keeping our [ authorizing ] risks under control. Despite the protection needs of different age groups, in third quarter, we worked with our insurer partners to co-develop a customized critical illness insurance product for children, which offers additional medical service benefits for leukemia. We also launched our various low-premium critical illness insurance product designed to meet the protection needs of the younger generations. In the third quarter, the insurance [indiscernible] for our customers under the age of 14 increased 20% quarter-over-quarter. Meanwhile, these customers' needs for asset allocation in a lower-interest rate environment will continue to enrich our [ key ] product metrics and improve the professional capability that our [ safety ] [indiscernible], prevailing products originating from our self-operated [ channel ] increased by 23% quarter-on-quarter. Fourth, the export of insurance technology. In addition to launched the WFind and so, we also upgraded the whole process of insurance claims assistance services to optimize user experience. Based on our analysis of a large number of claim cases, we have recalibrated, integrated the best practices into the whole process of our online claims assistance abilities. Empowered by our digital capability, we upgraded 8 claims assistance services and launched [ all ] new claims that have [ results ] within our [ most populations ], which help either handle various issues during the claims settlement process. For example, our intelligent [ optical scanning ] business system leverages our OCR-based extraction technology to effectively improve the equity of service [ uploads ]. Our product customization assistant uses our claims settlement insight to generate, innovate insurance product recommendations for either demanding more [ customer-side ] protection. In the future, we will continue to invest our claims service system and try to deliver a better claim expertise for our users. This concludes my briefing on our business -- on our insurance business. Now let me hand over to [indiscernible] for an update for our medical crowdfunding and patient recruitment business.

Thank you, Ran Wei. I would like to share some updates on our medical crowdfunding business. At the end of Q3, accumulated total of [ 420 million ] donors helped exceeding 2.69 million patients create over RMB 55.3 billion from our platform. Our user number and fundraising amounts have remained stable even after we implemented a service fee. In the third quarter, the Operational Transparency Committee continued to enhance our operational control related to authenticity and transparency on our medical crowdfunding efforts and launched new initiatives to increase the transparency of fund flows for each donation. For example, we have enhanced fund flow disclosure by certain statements and more defined visual details on the text from fundraising pages. When a patient withdraws money, the bank will issue payment placed for both our platform and the patient. The fundraising page will also disclose other information such as how much cash has been withdrawn by the patient, the service fee charged, the third-party payment internal fee and the amount of funds available for withdrawal. The fund flow related to each donation are thus easily traceable. Meanwhile, after several months on efforts, we worked closely with the police in Shandong to crack down on a case of fundraising fraud perpetrated by malicious individuals, resulting in the arrest of 17 suspects. Let me review various effective measures. The platform realized 0 malicious fundraising activities for several consecutive months. It's notable that our Waterdrop Medical Crowdfunding platform was successfully [ integrated ] into the classic case of joining [indiscernible] community of shared users in the cyberspace, which is initiated by the World Internet Conference. From a global perspective, most average families are [indiscernible] high of financial crisis caused by [indiscernible], especially the people in remote areas who have less social securities. When they unfortunately encounter a crisis in the midst of [indiscernible] injuries, they often have to choose to give up the necessary medical treatment or even they have lied because of the heavy financial burden. But our medical crowdfunding utilize the Internet to bring the [indiscernible] of mutual health to social media networks, which will facilitate the efficiency of [ finding some ] funds. Once the [indiscernible] protection network for millions of people in dozens of countries and regions, and thereby gaining a wide-ranging recognition. For the patient recruitment business, in the third quarter, our E-find Patient Platform sustained a high growth momentum, including more than 900 patients for clinical trials, with Q-on-Q growth rate of 36% and bringing our total number of clinical trial programs to more than 400. We have collaborated with more than 100 innovative pharmaceutical companies and CROs in China worldwide, and the number of patients and the number of partners continued to increase this quarter. In particular, our E-find platform has established collaboration with a number of leading global CROs. This has allowed us to work from several international multicenter clinical trials initiated by multinational pharmaceutical companies. In a lung cancer clinical trial project initiated by leading a domestic pharmaceutical company, our E-find Patient Platform demonstrates its unique strength in digital patient recruitment, and the test [ probably ] recruited 42 patients for the critical trial for 9 months, despite the ongoing COVID lockdowns in China. The pharmaceutical company, subsequently, honored us with the [ safe recruitment team ] award, and we are expected to become exclusive patient recruitment partner in the project to launch next year. Our new digital patient recruitment capability has helped us to build up an excellent reputation and an essential position in the industry. This concludes my part, and let me turn it over to the call to Hu Yao to discuss our technical innovation update.

[Interpreted] Thank you, [indiscernible]. Hi, everyone. I'm going to talk about our third quarter technology innovation update across 5 important platforms. Our chatbot not only serves as the ears and voice of our virtual employee but also features as a human-like mindset devised for the insurance marketing scenario. First, regarding the years of the chatbot. In the third quarter, we launched a set of optimization algorithms that enhance the accuracy of our ASR, automatic speech recognition technology, to improve our chatbot's ability to accurately recognize users' intentions. We deployed 2 algorithms, 1 which provides a background noise, identification and filtration, and another which is especially adept for analyzing [indiscernible], [ multicenters ] user responses, therefore enabling our chatbot to understand users just like human. Second, as for the voice of our chatbot, we have equipped it with a voice cloning technology that enables it to speak to our users while emulating the tone of our best sales staff, thereby enhancing the smoothness of the dialogue and improving the overall user experience significantly. Meanwhile, on top of our proprietary intelligent risk control model, we have also developed additional chatbot functionalities, which enable the estimation of our sales conversion rates, the selection of optimal outbound calling plans and the generation of complaint alerts. These models help the chatbot communicate with users at the most appropriate time with advanced dialogue [ spiel ] and with a more human-like mindset, thereby maximizing our sales conversion rate and minimizing the potential disturbance to our users. Second, I will address our efforts to refine our intelligent marketing operations through AI technologies. Our AI-powered machine system performs a number of functions, including the first-time allocation of leads, scheduling follow-up calls and the reassignment of leads. The system is one of the most important components of our intelligent marketing operations. In the third quarter, we upgraded the module, which performs first-time allocation of leads to Version 4.0, which enables more flexibility in AI-based decision-making, including lead sorting and matching. As a result, our API -- our [ APL ] efficiency improved by 12% compared with Version 3.0. We use AI to select the most appropriate call back time, have significantly improved our user experience and the sales conversion rates. Finally, we have also applied AI to determine the reassignment of leads, which helped enhance our [ APL ] with efficiency by around 16%. In summary, Version 4.0 of our AI-powered matching system is highly stable and efficient in lead making and has reached an industry-leading position. The system continues to play an important role in enhancing our sales conversion rates for long-term insurance products. Next, I will discuss our medical algorithm platform. Our proprietary extraction algorithm for medical records makes filling out medical records more efficient and speeds up our patient recruitment process. The classification algorithm implemented in our medical data center has significantly improved our data governance efficiency, with an accuracy rate of about 95%. In addition, our intelligent verification algorithm, which is capable of answering more than 20 types of questions automatically, has significantly improved the efficiency of insurance claims. In this quarter, we officially rolled out the AI video production function in our Waterdrop broker app. That means our brokers can now access customized AI-powered video production services within minutes, helping them use their personal brand. Through this exclusive video generation tools, we have enhanced our brokers' customer acquisition capabilities by empowering them to easily create original marketing content. Finally, I will give you an update on our intelligent risk control platform. We upgraded all of our risk control products and integrated them into a unified algorithmic risk control platform. The platform's integrated algorithmic capabilities not only provides strong risk control support to all of our businesses but also greatly mitigates a potential PR risk. I will give you 2 examples of its application. First, being in compliance with users' right to know requirements, we have developed a model which can recognize unauthorized fundraising activity and identifies the malicious intermediaries with a high degree of accuracy. This helps us better safeguard the interest of our users, maintaining the recognition of Waterdrop Medical Crowdfunding platform and stamp out malicious fundraising activity from the very beginning. Second, in order to protect user privacy, we have gone above and beyond the conventional methods to provide additional protections for public-facing information upgraded -- uploaded by our fundraising units. We use a sensitive information-masking model to automatically identify and mask personal information contained in uploaded image to avoid exposure of sensitive information and fulfill our duty to protect user privacy. Thank you. I will now hand over to Yang Guang to discuss our third quarter financial performance.

Thank you, Hu Yao. Hello, everyone. I will now walk you through our financial highlights for the third quarter of 2022. Before I go into details on the financial performance, please be reminded that our numbers reported here will be in RMB, and please refer to our earnings release for detailed information on our comparative financial performance on both the year-over-year and quarter-over-quarter basis. Despite the challenging external environment brought by the pandemic and the slow economic growth, we have [ tread ] forward in the profit-making phase, with 4 consecutive quarters of profitability, further withstanding the momentum as we have [ meticulously ] pursued a high-quality operational strategy since the third quarter of 2021. Net operating revenue increased by 10% quarter-over-quarter and decreased by 0.9% year-over-year to RMB 772 million, which was primarily due to the decrease in insurance-related income. For Q3, operating costs and expenses decreased by 50% year-over-year to RMB 639 million due to the effective cost control measures taken since the third quarter of 2021. On a quarter-over-quarter basis, operating costs and expenses increased by 17%. To break it down, operating costs were RMB 341 million, up by 15% year-over-year, mainly due to the increase in professional and outsourced customer service fee of RMB 22 million, the recording of crowdfunding-related service fees direct cost of RMB 63 million from sales and marketing expenses to operating costs as we started to charge crowdfunding service fees since April 2021 -- 2022 and RMB 19 million increase in the estimated cost of 1-year health insurance coverage related to the termination of mutual aid plan last year based on the final settlement information and partially offset by RMB 85 million decrease in personnel costs. On a quarter-over-quarter basis, operating costs increased by 40%, primarily due to professional and outsourced customer service fees increase by RMB 64 million as compared to second quarter of 2022. Total marketing expenses decreased materially by 82% year-over-year to RMB 137 million for the third quarter of 2022. The decrease was primarily due to a RMB 500 million decrease in marketing expenses to third-party traffic channels and RMB 122 million (sic) [ RMB 124 million ] decrease in outsourced sales and marketing service fees to third parties. On a quarter-over-quarter basis, sales and marketing expenses remained stable compared with RMB 144 million for the second quarter of 2022. G&A expenses have decreased by 26% in Q3 to RMB 82 million year-over-year due to the combined impact of a decrease of RMB 8.7 million in share-based compensation expenses, a decrease of RMB 9.9 million in personnel costs and a decrease of RMB 5.4 million in rental expenses. On a quarterly basis, the G&A expenses remained stable compared with RMB 86.1 million for the second quarter of 2022. R&D expenses decreased by 23% to RMB 78 million year-over-year. The decrease was primarily due to RMB 19 million decrease in research and development personnel costs and share-based compensation expenses and the increase by 11% quarter-by-quarter, which is primarily due to RMB 7.7 million increase in research and development personnel costs and share-based compensation expenses. During Q3, we reported a non-GAAP profit of RMB 215 million and a U.S. GAAP net profit of RMB 169 million compared with an adjusted net loss of RMB 453 million for the same period of 2021. The profit we have generated over the last 4 fiscal quarters illustrate the achievement of cost discipline and profit enhancement. As of September 30, 2022, our cash and cash equivalents and the short-term investment balance increased to RMB 3,588 million, an increase of RMB 300 million or 9% from the end of [ prior ] quarter as we continue to generate positive operating cash flow after we have satisfied the investing and financing cash outflow. So far, we have, once again, reinforced our financial guideline on achieving a non-GAAP profit in the year of 2022. And going forward, we will continue our efforts in consolidating our business, enhancing our revenue quality and instilling cost optimization. That's it for results. And now let's turn to our Q&A.

[Operator Instructions] The first question today comes from Mao Qingqing with CICC.

This is Qingqing from CICC. First of all, congrats on the results. We noticed that you have a sufficient cash reserve. My question is, what's your plan for utilizing it? That's all for me.

This is Yang Guang speaking, and I'll answer the question. Thank you for the question, Qingqing. I think as mentioned earlier, as of the end of September, our cash and cash equivalents and short-term investments totaled RMB 3.6 billion. So even taking into account our share repurchase, we were able to generate a positive cash inflow of RMB 300 million in the third quarter. Our ample cash reserve and our operating view to generate positive cash flow put us in a very strong position to deliver our strategic goal and withstand the evolving external environment. So I think we'll continue to maintain a reasonable and sufficient cash reserve. Meanwhile, we provided that we have ample working capital liquidity for our daily operations. We will use an [ approximate ] amount of funds to build our medium- and long-term competitive edge to achieve healthy and sustainable development. I think firstly, we will use our funds to implement our share repurchase program. And since our IPO, we have used our own funds and cumulatively bought back 5.8 million ADS from the open market for a total consideration of approximately USD 8.5 million. And based on our strong confidence in our corporate value and our long-term sustainable development, when in September, we announced the 1-year expansion of our repurchase program, with the maximum repurchase amount increased to USD 80 million. We plan to reserve the repurchased shares for share incentive plan, which will align the interest of our employees with the growth of our company. I think secondly, we will consider strategic investment at the right time. We will use a portion of the funds to pursue super strategic investments and acquisition opportunities. The purpose will be centering around the solid framework formed by our product innovation capability, technological innovation and the synergies created among our various unique servicing segment or to penetrate deeper to the industry and strengthen our vast ecosystem of insurance health care technology and, thereby, further expanding our presence in the industry. I think then thirdly, we will invest in new directions in the health care sector, relying on our established advantage in customer-patient relationship, and [ adding ] big data analytics, we can make breakthroughs in the medical innovation space. As mentioned by the call earlier, and our patient recruitment business is gradually becoming an industry here, and our CRO business has also made remarkable progress. So going forward, we will continue to allocate an appropriate amount of funds to pursue innovation opportunities in the medical and health care industry. So although the new business initiatives may not generate significant revenue and profit in the short term, but we believe that it will help the company create a new competitive edge in the long run and inject new momentum into the long-term growth of the company. I think that's all for the questions.

The next question comes from Edwin Liu with CLSA.

[Foreign Language] I have 2 questions here. First one is regarding the crowdfunding platform. Since we just finished the first full quarter of this crowdfunding where it started to charge the service fee, can you provide a breakdown of the revenue and profit for this segment and any color on the trend? And my second question is regarding the guidance. Appreciate it if management can provide guidance in terms of operating revenue and net profit for this year and next year.

Thank you for the question. To answer the first question, our Waterdrop Medical Crowdfunding platform has [ seeked ] to fully subsidize its service fee and started with charging a service fee of 3% in April of this year, up to a maximum amount of RMB 5,000 for a single campaign. And this is to cover part of the operational costs and help more patients with critical illness to [ raise capital ]. So the user number and fundraising income on our platform has remained stable after the charging of the service fee. And we will also regularly and transparently disclose our service fee revenue in our financial report through our other communication channels. Since April, when we started to charge the crowdfunding service fee, we have generated around RMB 120 million in service fee cumulatively as of the end of September. For Q3, our revenues from service fees were RMB 59 million, accounting for around 2.8% of the fund raised during Q3. The rate is below 3% because we are still subsidizing campaigns for collectively a few of the patients in some cases. So the direct operating cost of our crowdfunding platform was RMB 54 million. But in addition, there are also indirect cost formed by our company, including IT and middle office, risk control and other functions. So the service fee was [ barely ] sufficient to cover most of the direct operating cost. But overall, our Waterdrop Medical Crowdfunding platform remains on a healthy and stable growth track. However, we did not intend to trust the service fee for profit purpose or for our platform to maintain its daily operations sustainably and better serve our users. Our future plans will remain on track, unchanged, and that is to make the service fee cover the operational cost. So we will keep our crowdfunding platform on a healthy and steady development path and continuously upgrade the service and explore more monetization scenarios in an orderly and healthy manner. We will strive to provide premium fundraising service for more patients in need and help establish a strong health advertising system for the public. And to talk about the guidance for the year -- whole year profit, I think at the beginning of this year, we set the goal to achieve a non-GAAP profit for our established business for the year -- full year of 2022. So far, we have achieved a good progress with our strategic transformation, and we have continued to see improvements in our operating and financial performance. Since earlier this year, our revenue has gradually stabilized and returned to the growth track quarter-over-quarter. Since we worked to achieve an adjusted net profit in Q4 last year, we have maintained a healthy level of profitability in each quarter of 2022. In Q3, our net profit on GAAP basis reached RMB 170 million. Despite the external uncertainties, we have established the foundation for more healthy and more solid and more [ resilient ] growth path against the various external factors. We have entered into a phase of healthier and more sustainable growth -- business growth, with a more solid foundation for future business development. For our 2022 full year profit, we expect to maintain the profitable trend in Q4 and to achieve a net profit of around RMB 500 million for the full year of 2022, outperforming the goal we set at the beginning of the year. I hope that answers your questions.

The next question comes from Thomas Wang with Goldman Sachs.

A quick question on the increase in operating costs in the third quarter. So I just want to try to understand what's driving that increase? [Foreign Language]

I think the increase in the operating cost was due to the recording of certain crowdfunding-related service direct cost of RMB 63 million, switched from certain marketing expenses to operating costs as we started to charge crowdfunding service fees since April this year.

[Foreign Language]

Yes, of course, we only started to charge starting from April this year, so it doesn't -- it didn't cover the [ full ] quarter. And also, I think we will increase -- yes, we will increase cost on the professional and also the customer service fees. That's mainly related to the crowdfunding [ difference ]. Operator, do we have the last question?

Yes, we do. [Operator Instructions] The next question comes from Susie Liu with Bank of America.

[Foreign Language] This is Susie Liu from Bank of America Securities. My question is about future expansion strategy. We see that Waterdrop has already established a competitive advantage in Tier 3 cities or below. But which is the area you've been focused on? And going forward, are there any strategy to expand business in Tier 1 and Tier 2 cities? And could you share more details on your strategy, please?

Okay. Thanks. This is Ran Wei speaking. Talk something about interest in -- about expanding our business to first- and second-tier cities. Right now, more than 80% of our current is either from Tier 3 and below cities, which is consistent with [ population ] distribution. So from the perspective of absolute number, user -- our users in Tier 1 and Tier 2 cities, we have an advantage in the industry. So to expand either to the first and Tier -- the second-tier cities, we have 4 strategies. First, our online also brokerage business mainly works on Tier 1 and Tier 2 cities. We provide diversified business model such as the organization-based model, independent agent model and really [ just our model ] according to the local conditions and the launch of [indiscernible] systems that help brokers diagnose customer needs and provide appropriate interest base. This way, we can set the middle-class family in the first- and second-tier cities with more a professional and objective insurance solution. Second, we will leverage our customer insight to continuously reach our product offerings and develop product lines to better diversify users in Tier 1 and Tier 2 cities. Third, we will -- if the insurance is [indiscernible], which features in big conference and community marketed to facilitate customer acquisition. This will enhance our user experience and expand our reach among business in Tier 1 and Tier 2 cities who already have a deeper awareness of insurance. And fourth, and we are going to working with [indiscernible], which are popular emerging white collar workers and invest in promotion to pay with a higher recognition to deepen our brand awareness among customers in Tier 1 and Tier 2 cities. That's all. Thank you.

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. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]