Waterdrop Inc. (WDH) Earnings Call Transcript & Summary

Good morning, everyone. This is [ Tracy Lee ] from Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop's Third Quarter 2024 Earnings Conference Call. All participants are in a listen only mode in our English line. As a reminder, today's conference is being recorded. Please note that this discussion today will contain forward-looking statements made under safe harbor provisions of Private Securities and the 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 not limited to, those outlined in our public filings with the SEC. The company does not undertake any obligation to update any forward-looking statement except as required under applicable law. Also, this call includes discussion of certain non-GAAP matters. 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. Ran Wei, Director and GM of Insurance Business; Mr. Xu Xiaoying, Head of the Finance Department; and Mrs. Jasmine Lee, board secretary. We will be happy to take some questions in the Mandarin line at the end of the conference call.

Hello, everyone. This is Shen Peng. In Q3, the company remains committed to healthy operations and sustainable growth, delivering solid results. Total revenue for this quarter reached RMB 704 million, and net profit attributable to ordinary shareholders was around RMB 92.8 million, reflecting a year-over-year increase of over 150%. For the 9 months of 2024, the company reported total revenue of RMB 2.08 billion, up 5.8% year-on-year, and net profit attributable to ordinary shareholders of RMB 216 million, 142% increase compared to the last year. Since Q1 of 2022, we have achieved profitability for 11 consecutive quarters. In Q3, each of our business segments focus on enhancing user value with key metrics showing steady growth. In insurance business, we targeted senior, mothers and individuals with pre-existing conditions, expanding our network of insurers and launched of several innovative products. First year premiums totaled over RMB 2 billion, a significant increase year-on-year, with operating profit margin above 20%. In Medical Crowdfunding, we actively responded to new charity law and the merits for administration of online service platform for individuals seeking finance help, both user members and crowdfunding amounts continue to rise while the segment loss was further narrowed, reinforcing the sustainability of our operations. In the health care sector, our strong execution capabilities allow us to expand our network with pharmaceuticals with a number of enrolled patients growing both year-on-year and quarter-over-quarter. We're also delighted to report notable progress in AI. As a tech company rooted in insurance and health care, Waterdrop is on the forefront of integrating large language models into our industry. Following 2 years of focused development, we launched AI Top Sales Platform 3.0, conversational AI platform that customized AI sales agents for businesses, features, advanced AI abilities of outbound calling and conversational interaction, capable of supporting a voice-based sales and customer service across various B2C industry and helping our ecosystem partners enhance service quality and efficiency. Following our collaboration with P&C insurers in Q2, the AI Top Sales 3.0 platform reached a new milestone in commercialization this quarter. We expanded our partnership with more insurers and have initiated pilots with companies in noninsurance sectors, including e-commerce and education, where there is high demand for large-scale customer service team. As of now, we have established collaborations intentions with 10 clients across various industries with 8 already in the testing phase. This highlights the vast market potential for our sales agent solution. Going forward, we will continue investing in R&D to build our next core competitive advantage around AI applications. We value the trust from our investors and prioritize shareholder return. By the end of November '24, the company has cumulatively repurchased approximately 50.9 million ADSs from the open market totaled around USD 102 million. Moreover, we recently completed our second special cash dividend of approximately $7.3 million. For corporate social responsibility, as of the end of September, the Waterdrop charity platform has covered with 115 public charitable organizations and launched over 15,000 charity projects. During this quarter, we published our 2023 ESG report and so co-authored the ESG white paper for the online insurance industry. With the CUAC Green Finance Institute offering valuable insight into the industry ESG practice. Recently, the company received several strategic awards, including the China ESG Connected Pioneer Award and China ESG Excellence award, reflecting our commitment to ESG and our strong progress in this area. This concludes our update on business performance in Q3. Looking ahead, Waterdrop will continue to leveraging technology focusing on long-term, high-quality and sustainable growth centers around user needs. As AI continue to transform more industries, our AI capabilities and first-mover advantages in the large language model, position us for greater opportunities and growth in the future. I will now pass to Ran Wei to discuss our insurance business in Q3.

Thanks, Mr.Peng Shen. In Q3, the insurance business generated about RMB 2.04 billion in FRP at 20.4% Y-o-Y and 14.8% quarter-over-quarter. Insurance-related income was about RMB 600 million, representing a decrease of 3% Y-o-Y and an increase of 4.7% quarter-on-quarter. Operating profit was around RMB 120 million. The operating profit margin was maintained at above 20%. During this quarter, our short-term insurance equity hit RMB 1.37 billion, 30.3% Y-o-Y and 9.9% quarter-on-quarter. The increase in premiums on new policies primarily drive the growth. The company reach out to new customers through multiple channels and methods creating product IP on platforms like Little Red Book, TikTok and WeCom videos, collaborating with influencers and further optimizing customer acquisition efficiency based on our RTA model, the number of new users in Q3 remains stable on a quarter-on-quarter basis. Taking existing users, the company is committed to improving user experience and iterating insurance product offering according to the needs of different user profile. Leading to an increase in premiums sequentially. For example, regarding inclusive insurance products, the company has launched several products that do not require tax disclosure, have a 0 deductible and a pre-existing addition, thereby lowering our user barriers. Some products have added a special medical checkup service to enhancing user protection. In Q3, the FYP of tax pre-existing position insurance was nearly RMB 200 million. In terms of maternity insurance, the 3.0 version of [indiscernible] continue to gain user recognition and the parent-child critical illness insurance has been successfully launched. Due to this combined effect, the average premium for short-term medical insurance has increased 14.9% sequentially in Q3. In September, we held a Waterdrop insurance service ecosystem conference, where we practically partnered with several insurers, we must ensure to establish the triple group service agent alliance, aiming to enhance the entire user experience. The FYP for long-term insurance in this quarter reached RMB 607 million, a year-on-year increase of 4.3% and a quarter-on-quarter increase of 26.4%. The online sales teams has been stepping in their games -- stepping up in their games, boosting efficiency and driving increased premium per capita sequentially. The last final model, which is content driven has been a major player in the growth spurt, especially with the rising trend of annual payment product. On the supply side, we have been catering to the needs of senior -- we strengthened ties with insurance companies and broaden the scope and the protection of our disability insurance offering. We rolled out new edition of our disability income loss insurance, which covers people from 1927 and extended coverage up to 90. This quarter, disability insurance brought in around RMB 78 million in FYP, plus together with our insurance partners, we have built exclusive Lucky Star critical illness policy that covers 10 common brain conditions, giving comprehensive protection against brain health risks. On the service side, we continue to build up Waterdrop premium or club membership system covering over 30 benefits for our members, offering health management, medical express medical express access and the high-end customized service such as wealth management, children educational planning and emergency assistant for both long-term and short-term insurance users, leading to an increase of renewal rate in long-term products. Shenlanbao Insurance sector has also showed strong growth in Q3 contributing RMB 260 million in FYP with a significant increase in both year-on-year and quarter-on-quarter. During this quarter Shenlanbao further strengthen its lifetime and planner team, leading to a further rise in premium per capita. In Q3, Waterdrop insurance marketplace and Shenlanbao continued to deepen its collaboration in product and risk and research development, leveraging the Waterdrop LLM to enhance content generation and customer service scenarios for Shenlanbao. In terms of offline brokerage, Waterdrop [ Shinchin ] has announced a brand new update -- upgrade. Anything in comprehensive service system that integrates insurance, health care and legacy planning. Its initiative in compromise -- encompass a range of service, including expanding product offerings in the rating service system and billing mid-platform services, all designed to empower brokers in their concession. As for technology, the company continued to invest in insurance large language model. As of the end of September, the company has applied for over 40 patents related to LLM with 6 parents granted. Firstly, to date, the knowledge base of our Waterdrop Guardian has covered over 7,000 mainstream insurance products. Since the beginning of this year, the company has developed several intelligence products based on this. Secondly, the quality inspection process has been revolutionized with our AI service quality agents which has efficiently replaced the previous menu sampling method, by implying the AI preliminary check followed by human review, we have significantly boosted inspection efficiency, achieving full coverage in certain scenarios. And it processed orders at a pace that 3.7x factor than the conversional method, tangibly increasing our operational effectiveness. Thirdly, in the service scenario, Waterdrop Guardian developed the conversational skills of how do you use a human interaction in insurance product. During this quarter, our AI agent further enhanced its technology capabilities, integrating the long-term model and improving handling low-quality response in daily conversations and addressing a long-tail issue. This is a summary of this quarter's insurance performance. Next, Jasmine will introduce the developments of our company's crowdfunding and health-related business inQ3.

Thanks, Mr. Ran. At the end of Q3 2024, around RMB 466 million people cumulatively donated RMB 66.3 billion to about 3.32 million patients through our Waterdrop medical crowdfunding. This quarter marks significant milestone for our medical crowdfunding business in the industry as a whole. Following the issuance of the merit for administration of online service platform for individuals seeking financial help released by Ministry of Civil Affairs of PRC and other government deployments on the September 5, 2024. These merits outline specific regulations on fee structures, fund management and the fight against illegal activities, establishing a legal framework and enhancing operational guidance and transparency in the crowdfunding industry. We understand that the credibility is lifeblood of our platform. This quarter, we have been continually refining our risk control strategy to enhance transparency. For instance by iterating our public supervision mechanism, we ensure that the verification and handling of the report rate cases are clearly and properly communicated on the page, bolstering transparent and efficient oversight environment in cooperation with the public. At the same time, as the technology company, Waterdrop is continually exploring how technology can inherit platform. For example, our crowdfunding system employs algorithms to delivers one of the core pillar for high-risk cases. The platform is equipped to recognize the response to high-risk situation in real time. Even outsiders, the regular working hour platform of 1 to 6 a.m. by taking immediately emergency measures, such as popping crowdfunding cases and the spending payments, ensuring swift content of any risky cases. At Waterdrop, we firmly believe in the positive power of technology. In future, we will continue to protect every act of -- through technology innovation and improve the risk control mechanism. In healthcare-related business, this quarter, our health-related business maintained steady growth for digital clinical trial solutions business, our platform enrolled 909 new patients in Q3, adding to the cumulative total of over 9,500 since our launch, showing a consistent growth trajectory. Building on excellent fulfillment efficiency and quality. E-Find platform continue to expand and deepen in partnerships with leading pharmaceuticals, both domestically and internationally. In Q3, we collaborated with a total of 184 pharmaceuticals and CRO. During this quarter, the platform played key roles as a primary partner and even exclusive recruitment partner in several projects. For instance, in a clinical trial for rare oncology targets as an exclusive recruitment partner for the top MNC, we leverage precise analysts and intelligence matching of patient medical records to help pharmaceutical existing their enrollment target. As the industry moves towards high-quality growth top pharmaceuticals are embracing AI and big data in new drug development. E-Find platform with its digital expertise has been sharing insights with leading domestic and international pharmaceutical, earnings broad recognition. This has spurred the ongoing cooperation in new therapeutic areas. In Q3 alone, we signed 88 new projects. In digital multichannel marketing business, the platform has further integrated AI technology into various patient service stages. For example, in patient education and careers, our AI assessments quickly address the questions, delivering professional medical advice and service efficiency. For quality control AI systematic attack deployment, many checks are holding service standards and professionalism, plus using structured medical data and large language models, we guide patients in follow-up enhancing their disease management awareness and compliance. Looking ahead the platform will continue to collaborate with industry partners to explore further applications and possibilities of AI technology in pharmaceutical scenario of supporting the industry's digital transformation. Thanks for listening. I will now hand over to Xu Xiaoying to discuss our financial performance.

Hello, everyone, I will now walk you through our financial highlights for the third quarter. Before I go into details, please remind you that all numbers quoted here will be RMB, and please refer to our earnings release for detailed information on our financial performance on both the year-on-year and quarter-on-quarter basis, respectively. In Q3, the company continued to optimize financial performance with notable growth in profitability. Our total revenue for this quarter was RMB 704 million, showing a moderate quarter-on-quarter growth of 4.1%, bringing it down by business segment. The insurance business contributed approximately RMB 600 million in revenue, a quarter-on-quarter increase of 4.7%. The performing segment will generate services of around RMB 65.8 million quarter-on-quarter decrease of about 5%. digital clinical trial solution generated revenue of RMB 24.3 million, a quarter-on-quarter increase of 17.4%. Regarding operations -- operating costs and expenses our operating costs amounted to RMB 341 million, up 6.7% compared to the previous quarter, mainly due to a rise of RMB 32.6 million referral and service fees partially offsetted by the reduction of personnel costs. Sales and marketing expenses were RMB 173 million, a 10% quarter-on-quarter increase, driven by a strategic increase in advertising efforts based on the accurate and efficient operations, leading to a higher marketing expenses to third-party traffic channels. General and administrative expenses were RMB 111 million, an increase of RMB 17 million from the previous quarter, primarily due to the internal loss of intangible assets related to the acquisition of Shenlanbao. R&D expenses were RMB 53 million remaining stable compared to the previous quarter. In Q3, the company's profitability will -- profitability improved significantly year-on-year with net profit attributable to ordinary shareholders reaching RMB 92.8 million, 2.5x the third quarter last year, and a healthy quarter-over-quarter growth of 5.1%. The operating profit margin for the insurance business remained consistently strong at over 20%. With sustainable net profit, we continue to maintain positive operating cash inflow, ensuring a balance cash reserve as of September 30, 2024, the company had a cash position totaled about RMB 3,44 billion, supporting the company's flexibility and stability in shareholder returns and strategy deployment. In summary, the strong performance in Q3 highlights Waterdrop's resilience with facing the navigating market change. Looking ahead, we will continue to uphold our business philosophy and strategic choice, driving the company healthy growth. And ladies and gentlemen, with that, we will conclude today's conference call. We do thank you for joining. Have a good time.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.