Waterdrop Inc. (WDH) Earnings Call Transcript & Summary

Good morning, everyone. This is Lee Hongjing from Waterdrop Investor Relationships. It's my pleasure to welcome everyone to Waterdrop's Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. Please note that discussion today will contain forward-looking statements made under the safe harbor provision of U.S. Private Securities and the litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties and may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but 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 and applicable law. Also, this call includes a discussion of certain non-GAAP measures. Please refer to our earnings release for reconciliations 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, SVP and GM of International Business; [indiscernible], Director, GM of Insurance Technology business; Mr. Zetao Zhu, GM of Crowdfunding and Pharmatech business; Mr. [indiscernible], Board Secretary. And we will be happy to take some of the questions in the mandarin line at the end of the conference call.

Hello, everyone. This is Shen Peng. Thank you for joining our second quarter 2023 earnings conference call. With the second quarter, in insurance and pharmaceutical industry with the gradual enforcement of regulation, transparency and acceleration have significantly improved, effectively enhancing user experience and satisfaction. This has also [led ] insurance companies [ to embrace ] new growth opportunities. In this setting, the companies proactively contemplates regulatory trends, responds actively to market demand, continually innovate product and optimize service, [indiscernible] in these sectors. Regardless of the challenging actual environment, the management firmly convinced the adhering to long-term value and maintaining a user-centric approach with secure greater market space. And in the second quarter of 2023, the company continues to focus on creating value for our users [indiscernible] healthy development. The financial performance [ financial results ] with our revenue reached RMB 679 million, carrying over an upward trend for the last 5 quarters, the net profit reached RMB 21.7 million, demonstrating the sustainable and high-quality development of the company's operations. With the same cost of net profit, the company maintains ample cash reserves as of the end of June. The company had a total of RMB 3.4 billion in cash, cash equivalents and short-term investments. The abundant cash reserves helped the company to face uncertain environment with more confidence and support long-term [ planning and ] layout for the future growth. All of our business models achieved strong performance in Q2 and consolidating our leading position and influence in the industry. First of all, what is our insurance marketplace in [indiscernible] enhanced business vitality. While exploring diversified customer acquisition channels, we also take the product innovation, thanks to the efforts [ of our colleagues ] revenue made sequential growth and it continued to contribute stable net profit to the company. In terms of digital clinical trial solution business due to our excellent performance, the E-find platform gains recognition from both domestic and international partners. We continue to expand the [indiscernible] accelerating drug development for pharmaceutical and we'll also made significant progress in CRO. In Q2, digital clinical trial solution income was RMB 29.4 million and achieving a significant year-on-year growth of 167%. In addition, by iterating algorithms capabilities and risk management mechanism, our Waterdrop Medical Crowdfunding platform firmly adhere to concurrent operations and lead us to [ every ounce of compassion ]. Meanwhile, we enhance [indiscernible] model and embodies the principle of users first service [indiscernible]. Along with business development, the company continued to invest in research and development. In Q2, the company continued to upgrade technologies like intelligent chatbot deploying AI in various sectors, including operations, sales [indiscernible]. We strongly accelerated operational efficiency and the company persists in transporting the technology to empower the industry, in the complex and ever changing macro environment. The company [indiscernible] CSR. As of June 30, 2023, the Waterdrop [indiscernible] had collaborated with about 110 public charitable organizations to carry out project [indiscernible] education support. The program has raised about RMB 1.3 billion and raised the contribution from more than 65 million donors. We also continue to [indiscernible] ESG initiatives and strive to achieve mutual sustainable development between the company and the society. We benchmark domestic and international ESG standards to establish a [indiscernible] framework and publish the 2022 ESG report. The report summarizes our company's management and performance in areas like corporate governance, participation in multi-level medical support system, technology innovation, green and low-carbon initiatives and public welfare. We demonstrate the company's commitment to high quality and sustainable development in terms of share repurchase. As of the end of August 2023, the company has cumulatively repurchased 37.5 million ADSs shares in the open market with cash for a total consideration of approximately USD 86.1 million. We also want to announce the expansion of the repurchase plan, which has received approval from all our directors. Within the next 12 months, the company will repurchase shares in the open market for an amount not exceeding USD 50 million. This decision is based on the company's strong confidence in our own value and long-term sustainable development. Meanwhile, this share repurchase will be used for [ ESOP ], which will further motivate our employees. [indiscernible] is a brief review of our business performance in Q2, although facing the challenging natural environment we stay fully confident in our self and the industry. Moving forward to the remaining half of this year, our strategies include business driven by a long and digital transformation. Insurance systems will continue to be [indiscernible] striving to achieve long-term healthy and stable development. Meanwhile, we will continue to enhance [indiscernible] solidifying the business foundation and provide users with professional and software service. Secondly, the core funding business will continue to [indiscernible] in the first and iterating service model, giving the industry towards high-quality development. We will also adhere to transparent operations and inclement [indiscernible] risk management while actively fulfilling CSR. Thirdly, leveraging big data, the computer business will continue to increase industry penetration globally and activate for a new model in order to construct a new long-term growth engine. Fourthly, the company will make use of its ample cash reserves and take operations and investment opportunities around insurance and healthcare sector. Last but not least, the company will accelerate technology empowerment and it has AI ability to build a core technology competitiveness, thereby supporting the implementation of long-term strategies and inherent industries. The company will make use of ample cash reserves and take operation and investment opportunity around insurance and healthcare sector. The company will continuously develop long-term [indiscernible] to calibrating user value, strengthening their facility and organic growth and constantly [ expanding business boundaries ]. We'll continue to bring insurance and healthcare best service [indiscernible] through technology. And now let me give you an update on our insurance business. In the second quarter, in order to enhance service experience and enhancements, the company committed to use eccentric and high-quality development and continue to explore new service models. During Q2, we achieved RMB 219.7 million in good [indiscernible] premium and margins, a 30% sequential growth. Insurance related revenue reached RMB 597 million, reflecting 11% Q-o-Q for us. Short-term insurance achieved FYP of RMB 1.6 billion, marking a 30% sequential growth. On one hand, the company further developed our content base user activation capability. In Q2, we increased our brand exposure with client innovation and spreading high-quality content across medical platforms leading to a sequential growth in the number of new users. On the other hand, we kept calibrating our existing customer base, leveraging AI ability. The company continues to improve the quality of [ new service ] to over 90% of short-term insurance renewal rate. Long-term insurance achieved a FYP of RMB 590 million, representing a 29% sequential growth. The long-term insurance operating income increased by 38% sequentially. As long-term insurance products continue to expand, the proportion of life insurance premiums within the long-term segment has risen to 57%. During this quarter, the [indiscernible] of long-term insurance need [indiscernible] service model focused on common domains narrowed and intensified user education, which led to a 33% of FYP from private domain operations. The company also is experiencing [indiscernible] control our policy insurance leading to the sustained improvement in first year retention rates for marketing product. In Q2, Waterdrop continues to explore new growth channels to facilitating sustainable business growth. For our online brokerage channel, FYP experienced a 113% sequential growth with the decline in interest rates. The company developed a new insurance, which is focused on [indiscernible] insurance and life insurance to the younger users in the first- and second-tier cities. [indiscernible] the number of users for [indiscernible] insurance grew by 206% and high-quality content and segment [indiscernible]. The [indiscernible] decreased by 25%. Moreover, the team improved the service process [indiscernible] control is the first time response within 20 minutes. This leads to a 2Q increase of 49% in productivity per lead and 30% in productivity capital. In terms of offline agents and some market rebound and the team [indiscernible], we achieved a remarkable 206% Y-o-Y growth in FYP. We continue to enhance product offering and operational capability. We further upgraded our PD system [indiscernible] functioning models and automizing the experience for both agents and clients. We elevated recruiting standards and talent in new developments and actively explore agent IP. The average productivity per active agents increased by 201% Y-o-Y. The average number of long-term insurance policy for active agents increased by 48% Y-o-Y. During the second quarter, [indiscernible] insurance marketplace continue to enrich its product offering and [indiscernible] product targeting the basic user growth. [ For individual's] interest in long-term production and innovation medical treatment result, [indiscernible] we announced the new ocean lifetime health insurance. This [indiscernible] allows users to take [indiscernible] medical service at an affordable price and quickly provide an option for users to transport from shopping medical insurance directly to a 20-year long-term medical insurance. Thereby [indiscernible] will do their coverage targeting elderly. We introduced the [indiscernible]. This product is the first in China to cover many common serious illness among the elderly including malignant tumors that was listed in the annual product innovation list by 2023 China insurance industry [indiscernible] ranking. For [indiscernible], we continue to iterating our Blue Ocean series, which is the first domestic health insurance leading healthcare declaration. In Q2, this product series achieved FYP over RMB 100 million. Additionally, we actively explore multichannel sales of [indiscernible] and insurance covering education in operations and emergency. We saw a sequential increase in FYP. In terms of users with pre-existing positions, we continue to [indiscernible] innovation. For example, we designed a Waterdrop Carefree series, which can cover [indiscernible] and the FYP of business series of [indiscernible] in the industry, receiving high recognition from patients. In terms of surgical accident insurance, we offer solution across 5,000 departments in 32 hospitals, which help patients against [indiscernible]. As a technology company, we continue to develop our insurance technology. In the second quarter, we increased AI investments, enhancing the team and upgraded our AI-empowered [dialogue chatbot] into the basic short-term insurance service scenario. The chatbot can now communicate with users for more than 20 minutes. We have integrated the chatbot into various business scenarios, including operations, sales and claims. This integration has effectively accelerating service product and saved human cost. In terms of technology experts, we continue to strive for excellence with exporting to enhance the solutions. We improved the usable -- the usability and the configurability of both wealth management and [indiscernible]model. Additionally, we collaborated with 3 new partners to accelerate the industry transformation towards digital intelligence. This concludes my briefing on the insurance business. So let me hand over to [Zi Chao] for an update on our medical crowdfunding and digital clinical trial solution business.

Thank you, Shen Peng. As of June 30, 2023, accumulated total of 439 million people donated more than RMB 60 billion to over 2.95 million patients through Waterdrop Medical Crowdfunding platform. The member of users and crowd funding continue to grow. This quarter, Waterdrop operational transparency committee focused on the authenticity of asset claims in crowdfunding cases, continuously enhance the governance and transformation of consultant service. In terms of asset authenticity in order to reduce the risk of an inaccurate financial situation of crowdfunding patient families, the committee established a specialized [indiscernible] control which introduced the concept of core family and the net worth of asset and income in the description of patient's family financial situation. We upgraded a more accurate assessment of the reasonable target crowdfunding amount, not only adding application information and more convincing content, but also incorporating AI capability to identify both information with further improvement of its controllability. Moreover, this approach allows for better communication between the crowdfunding cases and the donors, which shows the platform's commitment to authenticity. The committee also initiated a specialized governance targeting crowdfunding consulting behavior. We kept strengthening non-compliance conduct, such as increasing [indiscernible] violation implementing a nationwide [indiscernible], combining the ability targeting higher risk scenarios. Meanwhile, we introduced consulting service principles such as full principle of service system and[indiscernible] in terms of service, the strength and proactive service awareness of consultants and help them better addressing patient needs establishing accordingly service standards throughout the entire process of crowdfunding [indiscernible] evaluation. Additionally we introduced a new consulting service evaluation system based on our user satisfaction. In terms of the transformation of offline performance service, we successfully piloted and expanded service-oriented [indiscernible] model in Changsha and Wuhan resulting in a significant increase in Net Promoter Scores within hospitals. We established a [indiscernible] partnership with several new hospitals in [indiscernible] service oriented consortium to provide assistance to both [indiscernible]. On one hand, our consulting [indiscernible] omit administration task such as handling email remainders, providing [indiscernible] support to daily workflow of merging enabling them to offer sudden medical care to patients. On the other hand, [indiscernible] patient, the role of consultant extends to a wider range of activity like providing general advice during hospitalization, offering guidance and a [indiscernible] interpreting and implying for medical insurance policy of [indiscernible] charitable care initiatives and so on. To embody the concept of [indiscernible] clinic trial digital solutions, the business continued to show strong growth leveraging its outstanding performance capability, the E-find platform successfully enrolled over 900 patients in Q2 marking a sequential growth of 33%. We collaborated with 132 pharmaceuticals and CRO globally, made an increase of 11 partners sequentially. These figures and core recognition by our clients as the platform's ultimate goal is continued to strengthen collaboration with domestic pharmaceutical while thickening the partnership with leading multination from digital [indiscernible]. In Q2, the platform launched about 80 new products. While the proportion of projects with [indiscernible] increased, the platform also achieved cooperation intention with two top 20 MNC pharmaceuticals, officially kick off the supply process and expect to launch products in Q4. In terms of recurring disease, the problem is further expanded in the state of chronic disease in addition to diseases like psoriasis, atopic dermatitis and asthma. It is due to urticaria, hepatitis B, uterine adenomyosis and rheumatoid arthritis. While ensuring product quality, the platform's fulfillment capabilities continue to grow. In Q2, the platform CRO business achieved significant progress by signing ground breaking CRO project. The project provides comprehensive clinical trial service encompassing data insight, medical sales, data management, statistical analysis, project management, patient [indiscernible], patient recruitment, patient management and their pharmacoeconomic analysis. This achievement underscores the platform's visibility for end-to-end operations in clinical trials. Meanwhile, the problem is actually exploring patient operation, leveraging its online operationability [indiscernible] in optimizing patient filtering, patient education, medication management and patient data research insights and other operational activities. Regards to R&D in medical area, we continue to upgrade our medical data center, which is now capable of completing first level structuring for 10 different types of medical materials adding approximately 600 new medical sales category and the level of extracting gross information such as for liver cancer, the system is now capable of automatically extracting information as disease staging, clinical staging, TNM staging and other relevant videos provide a strong data foundation for better customer service. Thank you for listening. I will now hand over to Yang Guang to discuss our second quarter financial performance.

Thank you, [Zi Chao]. Hello, everyone. I will now walk you through our financial highlights for the second quarter. Before going into detail, please be reminded that all numbers given here will be in RMB. And please refer to our earnings release for digital information on our financial performance on both the year-over-year and quarter-over-quarter basis, respectively. In the second quarter, all business lines were steadily recovering, demonstrating strong business resilience. The company's revenue was RMB 679 million, slightly lower compared to [ RMB 711 million ] in Q2 of 2022, an increase by 12% comparing to RMB 606 million for the Q1 of 2023. Among them, insurance-related income was RMB 597 million, representing a sequential increase of 11.4%. Crowdfunding service fees were $44.7 million, representing a sequential increase of 6.4%. Digital clinical trial solution income was RMB 29.4 million. It has increased by 28.9% sequentially and achieved a significant year-on-year growth of 157%. The company's overall premium cost and expenses have increased by 32.1% Y-o-Y and decreased by 20.9% Q-o-Q. Operating cost increased by 36.2% year-over-year to RMB 333 million for Q2 of 2023 compared with RMB 245 million for the Q2 of 2022, which were probably driven by 2 aspects. RMB 74.2 million increase in [indiscernible] experienced fee and RMB 8.9 million increase in cost of patient recruitment [indiscernible]. On a quarter-on-quarter basis, operating costs increased by 34.3% in this quarter, primarily due to a RMB 60.9 million increase in cost of referral and service fees. [ S&M ] expense increased by 41.6% to RMB 205 million in this quarter as compared with RMB 144 million over Q2 of 2022 and increased by 18% compared with RMB 173 million [indiscernible] first quarter of 2023. Both Y-o-Y and Q-o-Q increase were primarily due to the increase in third-party traffic channels. G&A expenses were RMB 96 million in this quarter, which remains stable on a quarter-on-quarter basis. R&D expense increased by 23.1% to RMB 86.7 million year-over-year and increased by 10.2% on a quarter-on-quarter basis. Both the Q-o-Q and Y-o-Y increase are mainly due to the increase in R&D costs of human resources. In this quarter, the company introduced segment reporting information for the first time, breaking down our revenue and profitability into 3 segments: insurance, core funding and others. In summary, the insurance segment had an operating profit of RMB 99.8 million, while the core funding segment incurred RMB 64.1 million operating loss and the other segment incurred a RMB 47.9 million operating loss. It is worth noticing that the company's overall profit is only driven by the insurance segment. Adjusted net profit attributed to Waterdrop in Q2 was RMB 50.3 million, with GAAP net profit was RMB 21.7 million, and we have generated GAAP profit over the past 6 quarters. As of the end of June 2023, the company had combined cash, cash equivalents and short-term investment of RMB 3.4 billion, indicating sufficient cash reserves. Overall, the business performance in Q2 was stable. Looking ahead, we will continue to focus on user value and sustainable high-quality development.

Ladies and gentlemen, with that, we will conclude today's conference call. We do thank you for joining. Have a good time.